There's been all kinds of hoopla about Roth IRA's and the unprecedented opportunity they present to convert your traditional IRA into one which pays out distributions free of income tax.
All that's required is that your new Roth IRA hold assets for at least five years and that you reach age 59O before pulling your money out (unless you die, become disabled or use the money to buy a home, in which event even the age requirement is waived). To qualify, your adjusted gross income may not exceed $100,000 in the year of conversion and, if you're married, you must file a joint tax return with your spouse.
Marc J. Lane & Company, our investment affiliate, has encouraged its clients to consider a Roth conversion only if their projected tax brackets in retirement won't be much lower than their current brackets, if they are years away from making any IRA withdrawals or if they don't need to withdraw their IRA assets, but intend to leave them to their heirs.
Why aren't Roth conversions attractive for everyone who qualifies? The price to convert is that the value of your IRA assets are includible in your taxable income. (For 1998 conversions only, that income can be spread over 1998 # 2001). For that reason, one needs to be sure that the value of tax-free growth more than offsets the front-end tax cost of the conversion.
We have been cautious about Roth conversions and especially wary of conversions early in 1998 when the stock market was at an "irrationally exuberant" level. (Now, it's high again but, some would agree, perhaps less irrational.) One concern we had was that a taxpayer might end up paying an artificially high tax bill on profits that didn't hold. But an IRS regulation issued earlier this year lets taxpayers avoid that unfair result by recharacterizing their Roth IRA's as regular IRA's.
Now the Service has spoken again, allowing a taxpayer to "reconvert" his or her regular IRA into a Roth IRA - presumably via a 60-day rollover, a trustee-to-trustee transfer or a direct transfer of amounts from one type of IRA to the other within the same financial institution. The new notice took effect on November 1 and applies for 1998 and 1999.
All this flexibility begs for planning. As IRA's become an ever increasing component of many of our portfolios, we urge that competent counsel be sought to make the most of all the new strategic possibilities.
The Lane Report is a publication of The Law Offices of Marc J. Lane, a Professional Corporation. We attempt to highlight and discuss areas of general interest that may result in planning opportunities. Nothing contained in The Lane Report should be construed as legal advice or a legal opinion. Consultation with a professional is recommended before implementing any of the ideas discussed herein. Copyright, 2003 by The Law Offices of Marc J. Lane, A Professional Corporation. Reproduction, in whole or in part, is forbidden without prior written permission.