Roth IRA Conversion — Tax Law
By: Karen Rinehart, CFP®
The Henssler Financial Group Position Paper

The Hensler Financial Group Wealth Management

Individuals who are making mandatory IRA withdrawals are not required to count this as taxable income when determining if they are eligible to convert to a Roth IRA account from a Traditional IRA account. This change was part of the 1998 IRS Restructuring and Reform Act. Being able to exclude the mandatory IRA withdrawals as income should allow more people to take advantage of the conversion.

Currently, an individual cannot convert their existing Traditional IRA to a Roth IRA if their modified adjusted gross income is more than $100,000. This limit applies to singles and married couples. Many times the mandatory IRA withdrawal increased individuals' incomes over the $100,000 threshold and they were not able to convert their Traditional IRA to a Roth IRA.

The change in tax law in 2005 was good news for people over 70½ years of age if they are trying to pass additional assets to their heirs. Individuals who benefit from this change are those that do not depend on distributions to meet spending needs or plan on leaving assets to a beneficiary. With a Roth IRA you are not required to take any withdrawals during your lifetime and any withdrawals taken by your heirs are also federally tax-free. The amount included in Roth IRAs is subject to estate taxes but the withdrawals will not be taxed.

You should be aware that the amount converted to a Roth IRA from a Traditional IRA is counted as taxable income and can push you into a higher tax bracket. If you are in a higher tax bracket you might be ineligible to take advantage of certain itemized deductions. You should determine how you are going to pay the conversion taxes before you convert the account. You should use funds outside of the Roth IRA to pay the taxes. You should also keep in mind that you are able to reverse a conversion until October 15th of the following year, if you file an extension. For more information regarding this topic, please contact The Henssler Financial Group at 770-429-9166 or comments@henssler.com.

All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing.
 
©2008 The Henssler Financial Group | www.henssler.com