Convert Traditional IRA dollars to Roth IRA Dollarsa "once-in-a-lifetime” opportunity"Authorized
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By David G. Freitag, CLU, ChFC, CRPC David G. Freitag, CLU, ChFC, CRPC, is Vice President of Marketing Impact Technologies Group. He can be reached at Dave.Freitag@impact-tech.com.  Coming on January 1, 2010 is a
“once-in-a-lifetime”
opportunity for every person
in the United States who has retirement money saved in traditional
IRAs or other qualified plans. Without earnings limits
they can convert to a
Roth IRA.This conversion
opportunity
allows for tax-free growth
of their retirement investment dollars while spreading their tax liabilities across 2011 and 2012. Yet, when considering whether your clients should convert traditional IRA dollars to Roth IRA dollars, it is reallyall about tax rates. If taxes are high, there is one major advantage with the traditional IRA, or any other type of pre-tax retirement savings plan. The money is tax-sheltered from those high rates. When the money is withdrawn and the rates are low, income taxes are paid at the lower rate. The inverse is true if the rates are currently low, but increase in the future. Retirement savings invested in a Roth IRA at today’s low tax rates are immune from future income tax rate increases, forever. Are there any clues we should look for? Clues To Indicate Rising Tax RatesCLUE 1
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UPDATE
The U.S. Debt is estimated at: $12,278,635,997,966.88
Your share of today's public debt is: $39,934.67 Congressional Record Data . THE
HIGHER-INCOME TAXPAYER PARADOX
Lori Montgomery, in her Washington Post article dated September 9, 2009, quoted Timothy Geithner in a statement on ABC News: “We have to bring these deficits down very dramatically and that’s going to require some very hard choices.”  In the Washington world of political rhetoric,
when it comes to taxes,
“hard choices” usually mean that tax rates are going up. When you look
at the clues, and these clues do not even consider the impact of health
insurance reform, it is virtually impossible to believe that the
current 35 percent top bracket will last into the foreseeablefuture. The people who are going to be paying those tax increases are those with high incomes. The people with high incomes have a target painted on their chests that will invite a series of unwelcome visits from Uncle Sam. This leads to something called the “Higher-Income Taxpayer Paradox.” This paradox assumes that wealthy people who have saved money in qualified plans at low tax rates will, at retirement, take money out of qualified plans at high tax rates. This great strategy for the government is not a very good strategy for higher income retirees. The best solution to this tax-rate savings paradox is the Roth IRA. The Roth IRA requires that taxes be paid upfront, and for this upfront payment, the Roth IRA offers great flexibility to the taxpayer. With the Roth IRA, there are no required minimum distributions at age 701/2, and the money in the Roth IRA grows tax-free. Generally, there is no income tax on the withdrawals from a Roth IRA. Plus, there are no IRS taxes imposed on beneficiaries of Roth IRAs. In addition, contributions can be made to a Roth IRA after age 701/2 when there is still earned income. Ideally, Roth IRA contributions are made when taxes are low, and withdrawn tax-free during retirement when taxes are higher. In a word, the Roth IRA is a great deal. It is such a great deal that higher income retirement savers were prohibited from participation by the government. If individuals had modified adjusted gross income (MAGI) of over $100,000, participation in the Roth world was either restricted or not available at all. The legislative thinking was that the very liberal, tax-friendly, Roth tax-advantaged savings plans should only be extended to lower-income wage earners. 2010
ROTH CONVERSION EVENT OPPORTUNITY
Here is the
good news.
 On January 1, 2010 the $100,000
MAGI restriction
for Roth Conversions is eliminated. All
taxpayers can convert their existing Traditional IRA accounts,
their 401(k) plan balances, and their 403(b) plan balances
into Roth IRAs. Although new contributions to Roth accounts
are still subject to earned income limits, for the higher
income taxpayers, this new conversion opportunity may be the
only way to get into the Roth arena.What’s the catch? The catch is that income tax must be paid on the withdrawals from traditional tax-qualified accounts to make the conversion. The good news is that the tax on conversions in 2010 may be at one of the lowest tax rates in recent history. The better news is that the tax burden created by the withdrawals in 2010 can be spread over 2011 and 2012 equally. The government is here to help, after all, or is it? There might be some urgency to pay all of the tax due in 2010. The downside to spreading the tax over two years is that the tax rates could be incrementally higher in those years than they are now. The Roth conversion is a tax-diversification strategy that injects flexibility into a retirement plan. The Roth conversion creates an excellent pool of capital that can be passed along to children or grandchildren, income-tax-free. Unfortunately, according to an on line study of investors made by Fidelity between August 14th and August 28th, 2009, most people were not aware that the Roth IRA would be available to them in 2010. Of the 800 participants in the study, 88 percent said that they were unaware of the conversion opportunity and 34 percent did not understand the tax implications of the Roth IRA conversion. As attractive as Roth conversions are for wealthy tax payers, the personal circumstances of each tax payer will ultimately determine if making a Roth conversion is a good idea. And, that’s when the assistance of a qualified financial professional is critical to investors. 
When it comes to making this type of decision, it is helpful for financial professionals to “model” the conversions for their clients using software tools. A good software analysis model should project three scenarios:
See Daves interview on the Wealth-Channel....as well as other advanced marketing subjects. Helping clients improve their retirement financial plan by making a Roth conversion is a “once-in-a-lifetime” opportunity that should not be missed.Learn and Earn - Go to our Help Library for more articles like this.Return from this Convert traditional IRA dollars to Roth IRA dollars page to the Financial Planning Software page.
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