The Pension Protection Act of 2006, which gave taxpayers over 70 ½ the ability to use their IRA to make charitable contributions during 2006 and 2007, also includes provisions establishing the ability to convert a traditional IRA into a tax free Roth IRA starting in the year 2010 for all taxpayers, regardless of income limitations. This is in sharp contrast to the current income limitations prohibiting such conversions for those taxpayers having income over $100,000.00.
A Roth IRA is a retirement vehicle into which you deposit previously taxed dollars; and which then permits the earnings to be completely tax free at anytime thereafter. Furthermore, the amounts accumulated in the Roth may be withdrawn at any time after you reach the age of 59 ½ completely tax free by either yourself or your heirs with no required minimum distributions, ever.
The conversion will be a taxable event, although you will be permitted to spread the resulting tax over two (2) years. [As an aside, it is my opinion that the reason this tax opportunity was scheduled for 2010 was to try to raise additional revenues during a year when it is projected that revenues might have dropped significantly by virtue of the fact that the Estate Tax may be eliminated in that year.]
Again, this is a strategy that should be discussed with your tax and/or financial advisor with respect to your overall plans and financial circumstance. However, it offers an important planning opportunity that would eliminate the need to begin to withdraw money when you might not otherwise need it or might be in a higher tax bracket than while you were working.
The current application of this planning strategy is to consider taking complete advantage of every opportunity to contribute to your current available pensions in every year between now and 2010, to enable you to have more available for conversion.
By: Bruce M. Fogel, Esquire
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