Laurie Flynn is a Financial Advisor with Smith Barney and is a supporter of Queercents. She’s written a few posts these past weeks on the topic of investing. These are her words…

New Tax Structure May Affect Your Retirement Accounts

Smith BarneyPresident Bush recently signed the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) into law, creating many challenges and new opportunities for taxpayers. In 2010, for example, the new tax structure makes high-income earners eligible for Roth IRA Conversions as it lifts the $100,000 income ceiling.

Usually, taxes from converted funds (earnings and any deductible contributions) are due in the year of conversion. However, TIPRA allows the taxes on Roth conversions in 2010 to be paid over the next two years (2011 and 2012). Owners must leave converted funds in the Roth IRA for five years from the conversion date to withdraw the funds tax-free. Any distributions from a Roth conversion IRA before the five-year period will be subject to a 10% penalty. Additional contributions to a Roth IRA can only be made if the IRA holder’s adjusted gross income (AGI) is under $110,000 if single, or $160,000 if married.

You may want to consider a Roth conversion if:

  • You are many years from retirement and have the time to earn back the amount of money paid for taxes when you converted your IRA.
  • Your Traditional IRA has been opened for a short period of time and the contributions have been mostly nondeductible. Your tax liability will likely be low at conversion because taxes are paid only on the growth of the funds and on the deductible contributions.
  • You plan to leave the bulk of your IRA funds to heirs. Your funds will have a longer time to grow tax-free and recover the taxes paid at conversion. Also, unlike a Traditional IRA, the Roth has no requirement to withdraw funds at age 70Â ½, which gives you the potential to leave a larger tax-free account to loved ones.
  • You anticipate your tax bracket will remain the same or will be higher during retirement. The tax-free withdrawals of a Roth will have more benefit.
  • You can pay the taxes from sources outside the IRA, so you don’t deplete the account further. If you’re under age 59Â ½, an additional penalty applies to funds withdrawn to pay the taxes.

If you don’t have a Traditional IRA, you might want to fund an account for the next five years in anticipation of converting the account in 2010. If your contributions are nondeductible, you will owe taxes only on any growth in the account. If you have other IRAs, a pro-rata share of income in all your IRAs will be taxable.

Every situation is different, but some general rules of thumb exist for converting to a Roth IRA. Speak with your tax and financial advisors about strategies that may be appropriate for your particular situation.

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Laurie Flynn is a Financial Advisor with Smith Barney located in Toms River, NJ and may be reached at (732) 914-2315 OR (800) 624-0292 Ext. 2315.

Website: www.fa.smithbarney.com/laurie_flynn

Smith Barney is a division and service mark of Citigroup Global Markets Inc. Member SIPC.