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.
