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Roth Redux – Dusting Off One of 2010’s Best Tax Strategies

Roth conversions. Remember them? They were what some considered the sliced bread of the income and estate tax planning world back in 2010. Well guess what, we believe that they’re still a great tool when used in the right circumstances. To refresh your memory, a Roth conversion is when you make a penalty-free withdrawal from a traditional IRA and deposit the proceeds directly into a Roth IRA. This is an immediately taxable transaction. While in the Roth IRA, the funds continue to grow free of taxes and any distributions after a five-year waiting period is free of tax. Unlike a traditional IRA, you are not required to take distributions from a Roth IRA at age 70½.

Why do we think that this technique is still compelling today? It’s a potential tax hedge. With IRAs, it’s never a question of IF taxes will be paid on them, it’s simply a matter of WHEN they will be paid. With today’s maximum tax rate slated to jump to 39.6% and the pending Medicare surcharge that makes its debut in 2013 on top of that, it just might be that the current 35% maximum tax bracket never looked so good.

If that’s not enough, then maybe this will be the clincher: if for whatever reason you execute a Roth conversion and get cold feet at a later date, you can always re-characterize the conversion. That means you can take the money that you moved from your IRA to your Roth IRA and put it back into your IRA, and it would be treated as if it never happened. No taxes would be owed and no penalties would apply. You have until the filing deadline of your tax return including extensions (generally October 15th) of the year after the conversion. In this case, what’s to lose?

Naturally, you should speak with your wealth manager and your tax advisor before pulling the trigger on a Roth conversion as, while it may seem too good to be true, it’s not right for everybody.

 

Important Disclosure Information

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request. This information is not a substitute for personalized advice from RegentAtlantic. This information is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

This information is based on our current understanding of tax law and is subject to change.

Please note that RegentAtlantic does not provide tax advice. Please consult with a tax advisor prior to implementing any strategy discussed in this article.

Important disclosure information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.

This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.

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