practice specialties
| By Gregory B. Gagne, ChFC
FINANCIAL PLANNING
Ready, Set, Roth!
It is possible for all of your clients to convert their IRAs to Roth IRAs, starting next year.
The current rules for Roth eligibility reduce or prevent “contributions” to a Roth account if your client
earns too much income. (Currently, the
phase-outs occur at $166,000 of modified adjusted gross income for a married
couple and $105,000 of MAGI for a
single filer, based on 2009 figures.)
Additionally, your client is unable
to “convert” his existing IRAs to a
Roth IRA if his income exceeds the
$100,000 MAGI threshold. Many
consumers can’t establish a Roth or
convert their funds to a Roth IRA at
this time. This article highlights the
rule change that makes conversions
a possibility for all of your clients,
beginning Jan. 1, 2010.
Current rules prevent people with
MAGI incomes above $100,000 from
converting their existing IRA assets to a
Roth IRA. This $100,000 limitation is
being lifted so that anyone who wishes
to have a Roth IRA can do so via the
conversion technique.
Please note that when a conversion is
executed, the amount converted is subject
to income taxes on all pretax contributions being converted. Based on your client’s tax bracket and what may happen to
tax brackets in the future, this option may
be a prudent financial-planning move for
your client, as well as a wise-estate planning technique for his family.
When retirement assets are converted,
taxes will be due on the conversion at our
current tax brackets. Above are the tax
brackets for 2009. (At the time this article
was written, the 2010 tax figures were
not available.)
To maximize the benefits of the
conversion, it is best to pay the taxes due
on the conversion with outside assets. For
example, if your client converts $10,000
to the Roth, the taxes due are $1,500. If
10%
15%
25%
28%
33%
35%
Tax rate Single filers Married filing
jointly, or qualifying
widow/widower
Married,
filing separately
Head of
household
Up to $8,350
Up to $16,700
Up to $8,350
Up to $11,950
$8,351-$33,950
$16,701-$67,900
$8,351-$33,950
$11,951-$45,500
$33,951-$82,250
$67,901-$67,900
$33,951-$68,525
$45,501-$117,451
$82,251-$171,550
$137,051-$208,850
$68,526-$104,425
$117,451-$190,200
$171,551-$372,950 $208,851-$372,950
$104,426-$186,475
$190,201-$372,950
$372,951 or more
$372,951 or more
$186,476 or more
$372,951 or more
he pays the taxes from the conversion,
only $8,500 will be in the tax-free Roth. If
he elects “no taxes” withheld and pays the
taxes with cash, then the full $10,000 can
be placed inside the Roth.
Current rules state that taxes due on
the conversion must be paid during the
year of the conversion. Starting Jan. 1,
2010, a major change in this rule will
occur. Your client can now elect to pay
the taxes due for 2010 during 2010 or
he can convert and elect to pay the taxes
equally in 2011 and 2012. This opportunity for spreading the tax is only available
for conversions made during 2010.
$12 trillion, and the White House is
forecasting $9 trillion in additional
debt over the next decade. It will take
more than careful spending to reduce
this looming number, and taxes are
likely to increase in future years.
■ The beneficiaries of the Roth IRA can
inherit the accounts tax free. Further,
if they establish a “Stretch Roth” via
proper beneficiary planning, the Roth
can fund tax-free cash flow for life.
The impact of a tax-free cash flow for
life is tremendous.
Need for Roth conversion
There are numerous reasons why your
clients should consider converting
their assets to a Roth IRA next year.
They include:
■ There are no required minimum
distributions in the Roth. If your client
does not want to touch the money, he
never has to.
■ Once the assets are in the Roth, they
will grow tax free, not tax deferred.
The national debt stands at almost
You can help your high-income and
retired clients right now by scheduling
review meetings with them to discuss
the possibility of creating more of a tax
balance by introducing the Roth IRA.
Educate them about the potential of this
valuable planning technique and you will
build clients for life.
Gregory B. Gagne, ChFC, is the owner
of Affinity Investment Group, LLC, past
president of NAIFA-New Hampshire and
an MDRT member. Contact him at greg@
affinityinvestmentgroup.com.
16 ADVISOR TODAY | November 2009
