New Roth IRA Opportunities for Higher Income Taxpayers

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government contractor and technology tax; business advisory

By: Jim Wagenmann

Abstract:

First established in 1996, Roth IRAs have become a widely used tool in planning and saving for retirement. Unlike traditional IRAs, which provide tax advantages when an individual contributes to the account, Roth IRAs provide tax advantages when the funds are withdrawn at retirement. Because Roth IRA contributions are nondeductible, distributions from such accounts are typically not included in taxable income when received. Whereas, withdrawals from traditional IRAs are generally taxable as ordinary income.

For tax year 2009:

· The maximum contribution allowed to a Roth IRA for individuals under the age of 50 is $5,000 annually, with an additional $1,000 “catch-up” contribution allowed for individuals who are age 50 or above.

· The maximum contributions are limited to “earned” income (for example, wages or other income from self-employment).

· The ability to contribute to a Roth IRA phases out for single filers with an adjusted gross income between $105,000 and $120,000 and for individuals who are married filing jointly, with an adjusted gross income between $166,000 and $176,000.

· Individuals wishing to convert a traditional IRA to a Roth IRA may do so if income (determined with certain adjustments) does not exceed $100,000 for the year. The amount converted is treated as a distribution from the traditional IRA without penalty and a contribution to the Roth IRA. The taxable portion of the amount converted is treated as taxable income in the year of the conversion.

Additionally, for conversions made in 2010, unless a taxpayer elects otherwise, none of the gross income from the conversion is included in income in 2010; half of the income resulting from the conversion is includible in gross income in 2011 and the other half in 2012. A taxpayer may elect to pay the tax in 2010 if the tax rates for 2011 and 2012 increase significantly.

Effective for tax years 2010 and beyond, the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) eliminates the income limitations noted above. Additionally, for conversions made in 2010, unless a taxpayer elects otherwise, none of the gross income from the conversion is included in income in 2010; half of the income resulting from the conversion is includible in gross income in 2011 and the other half in 2012. A taxpayer may elect to pay the tax in 2010 if the tax rates for 2011 and 2012 increase significantly. Even though current income taxes are generally payable on the amount converted to a Roth IRA, such a conversion may produce an overall tax benefit for individuals who will be in the same or a higher tax bracket when the funds are withdrawn and can pay the tax from sources other than the IRA itself.

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