2013 May Be The Perfect Year To Convert To A Roth; It's A Good Conversation For Setting Up A Client Review To Plan For The Year

Tuesday, February 19, 2013 07:54
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2013 May Be The Perfect Year To Convert To A Roth; It's A Good Conversation For Setting Up A Client Review To Plan For The Year

Tags: Congress | roth ira conversion | Taxes

If your clients have been wondering whether it makes sense to convert to a Roth IRA, this might be the year to say yes.
 
The new tax year delivered a threshold of $400,000 individually and $450,000 for married couples as the threshold for the higher income tax bracket.
 
It also means they can convert up to $200,000 more into a Roth without crossing the higher-tax-bracket line.

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Because the Bush era tax cuts were made permanent for those under the threshold, it’s no longer necessary to convert as much as possible in one year to lock in a favorable tax rate.
 
Investors can instead spread their conversion amounts over a period of years. They can even decide to re-characterize their 2012 conversions made in anticipation of higher tax rates as the 2013 dawned.
 
Re-characterizing basically means undoing a conversion. So if you had $500,000 in your IRA last year and you decided to convert it to a Roth in anticipation of higher tax rates, you could re-charaterize $400,000 of the Roth and put it back into the traditional IRA.
 
Then you could spread the other $100,000 over the next four years and still not be pushed into the new 39.6% tax rate.
 
The only caveat is that you have to wait at least 30 days after your conversion to do the re-characterization.
 
There are other options available now, too, such as spreading the tax liability of a large converted amount over a period of years, making it easier to stomach than having to pay the liability all at once.
 
Of course, the 3.8% Medicare surtax might come into play, making the original idea of converting still the best option.
 
And what means permanent to Congress may only be permanent until lawmakers decide to raise taxes again.

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