Email Update Service for CPAs & Attorneys
IRA & 401(k) Distribution Regulations
For Participants & Heirs
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Prior Announcements
from Ed Slott
Income Cap Eliminated for Roth Conversion 5/17/06
This is the first of a series of informative emails on the latest updates for IRA and 401(k)
distribution regulations for participants and heirs.
The President signed the new tax bill May 17, 2006 which allows high income wealthy individuals to now
make Roth IRA conversions in 2010 and pay income taxes spread over 2 years in 2011 and 2012.
Yes that's right, convert in 2010 but pay the taxes in 2011 and 2012. This gives us all lots of time
to plan for our high net worth clients. See The Elite IRA Advisor update from Ed Slott at the bottom
of this email on what to do now..
I was recently invited to participate in Ed Slott's Elite IRA Advisor Group. I am one of a select
group of 90 financial advisors who have demonstrated their expertise in managing the distribution
from tax deferred retirement plans for the participant and their heirs. This allows me to be on
the forefront of the latest tax law changes, IRS regulations, private letter rulings in order to
provide solutions for professionals and their clients regarding the complex issues of retirement plan
distributions.
I hope you will find this and other emails on this subject informative and useful. If you know
of anyone else who you think might like to be added to this distribution please let me know by completing
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Ed Slott is not affiliated with Foothill Securities, inc. and the articles on his website reflect his view and not
necessarily the view of Foothill Securities, Inc. or of its representatives.
For informational purposes only, and should not be used without consulting your CPA or Attorney.
IRA Update from Ed Slott
To: Elite IRA Advisors
May
12, 2006
Big Roth IRA Story….
New
tax bill eliminates eligibility rules for Roth IRA conversions
The House passed the Tax
Increase Prevention and Reconciliation Act (TIPRA) Wednesday, the Senate
passed it yesterday, and the President is expected to sign it into law.
The change
is not effective until 2010!!!
For conversions done
in 2010 the taxes can be spread ratably over 2 years and included in
income for 2011 and 2012.
That is not a typo; the
taxes due on a conversion done in 2010 can be included in income for
2011 and 2012!
A
taxpayer with MAGI over $100,000 or who had a tax filing status of married
filing separate was not eligible to convert to a Roth IRA. Those restrictions
disappear as of January 1, 2010 allowing anyone with an IRA the ability
to convert to a Roth IRA.
What to do now?
Advise clients
who are not eligible to make Roth contributions or conversions now,
but would like to have a Roth account, to start maximizing IRA contributions
this year. Deductibility of the contribution should not be an issue;
paying the tax now means less tax is paid at the time of the conversion.
Clients thinking
about doing a large Roth conversion soon should consider waiting until
2010 to do it so they can spread the tax bite over 2 years instead
of paying it all at once.
The deferral
of the income tax due on the conversion is like getting an interest
free loan from the government for 2 years. The
tax free earnings you have in the Roth during that time could potentially
cover your entire tax bill.
Access to Roth funds
remains unchanged. A qualified distribution (one that is not subject
to income tax or penalties) is one that is made 5 years after a Roth
account is established and the taxpayer is over the age of 59 ½. A
client who is concerned about having access to their Roth funds and
who does not have an existing Roth should open a Roth IRA in 2006,
if they meet the income limitations. They will then be able to take
a qualified distribution in 2011 if they were over the age of 59 ½ at
the time they did the conversion in 2010. A client who is not able
to make a qualified distribution will still be able to take a distribution
of their “basis” (amounts contributed or converted to the Roth IRA).
Basis amounts (from conversions only) distributed could be subject
to the 10% early withdrawal penalty.
Clients planning on doing
a conversion in 2010 have 6 years (2006 – 2011) to accumulate
the funds necessary to pay the income taxes on the conversion.
This bill does not affect
the income limits for contributions to a Roth IRA. Those limits still
stand but can easily be bypassed in 2010 and later years by making
an IRA contribution and doing a conversion to a Roth in the same year.
The President is expected
to sign this bill into law any day.
By Ed Slott © 2006
