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Coaches Corner

The Year of the "Roth"

by Robin S. Davis, CFP

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The Year of the A Gift from the IRS in 2010

I've said it before and I'll say it again, when the Internal Revenue Service (IRS) gives you a gift, find a way to take advantage of it.  One of the best gifts they will ever give you is to allow money to grow tax-deferred during your lifetime with subsequent withdrawals being completely income tax-free.  In 2010, the Tax Increase Prevention and Reconciliation Act (TIPRA) will give millions of people the chance to open a Roth Individual Retirement Account (Roth IRA).  Everyone will have an opportunity to convert an existing "traditional" IRA to a Roth IRA.  As a bonus gift, the IRS will allow the taxes due on any conversions to be split between the next two tax years that include 2011-2012.

Most people can benefit from having a tax-free account accumulating in their retirement portfolio.  The people who will benefit the most are high-net-worth individuals who could not convert in the past due to past income restrictions; those people who have other assets outside their IRA's to pay the taxes on the conversion; and, people who do not like the IRS required minimum distribution rules which require you to start taking distributions from traditional IRA's by the age of 70 1/2.  If you fall into one of these three categories, you should consider taking advantage of this opportunity.

This gift is not altogether painless, however.  Whenever the government gives something away, they attach rules to it.  The rules of the Roth are simple:  Withdrawals must not take place within five years of the first contribution; the Roth owner must be at least 59 1/2 years old (death and disability rules apply); and, taxes must be paid on the conversion.

The advantages may outweigh the above disadvantages.  If you are under the age of 59 1/2, the 10% tax penalty on early withdrawals is waived; as mentioned, there are no required minimum withdrawal rules on the Roth IRA; and, the taxes due can be skipped for 2010 and split on your 2011 and 2012 tax returns.

One of the biggest advantages would be to convert traditional IRA's early in 2010 as they have probably been beaten up a little in recent years if invested in the stock market and may not yet be back to their high levels.  Converting while your traditional IRA values are down will keep the taxes due low and allow the Roth IRA to grow back to those highs on a tax-free basis.

By using money from other taxable assets to pay the taxes due on any converted IRA'S, you can shrink the portion of your estate that is currently creating taxable income for yourself.   Another benefit is the ability to leave a Roth IRA to a spouse who can continue to defer the IRA until it goes to your children.  Although the children must start taking mandatory withdrawals by December 31st of the year following the year of the IRA owners death, they can determine the withdrawals based on their life expectancy giving them an opportunity to continue tax-free growth for as long as possible.

The long-term growth of a Roth IRA has huge benefits for someone who does not need income from this source at retirement, has a long life expectancy (or spouse has a long life expectancy), and has children or grandchildren they would like to leave a legacy to.  The Roth can be used as an estate planning tool to eliminate one of the taxes that are due at death.  In large estates, the estate may be liable for estate income taxes and estate inheritance taxes.  By converting to a Roth, you can eliminate the income tax burden passed to your children at your death.

As in all decisions that result in a tax liability, this one should not be taken lightly.  I suggest consulting with your investment advisors and tax advisors to weigh the pros and cons of a conversion and determine how much of your traditional IRA's should be converted, what the tax liability will be, and which assets should be sold to pay the taxes.  Your future income needs and estate plan should be a big consideration before proceeding.

Robin S. Davis is a Certified Financial Planner™, a member of the Financial Planning Association, and is the owner of Davis Wealth Management Group, Inc., in Stuart, Florida. She has been advising retirees since 1984 and has held over 500 public seminars on financial issues. She is the author of the book Who's Sitting On Your Nest Egg? Why You Need a Financial Advisor and Ten Easy Tests for Finding the Best One. Davis expresses the importance of utilizing a competent financial advisor. For more information, please call (800) 896-5422 or (772) 463-4441, visit, or email:

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