Roth Conversion Planning
With the end of the year coming up it seems appropriate to mention an often overlooked potential planning strategy. For some taxpayers who have very little ordinary income and still have deductions resulting in little to negative taxable income for the year, it may make sense to consider doing a Roth conversion on a portion of any tax-deferred retirement accounts.
In a Roth conversion, assets from a traditional IRA or 401(k) are transferred into a Roth IRA. The taxpayer declares the value of the amount transferred as ordinary income on their tax return for the year, and pays tax accordingly. If you have been in a situation where you typically have little to negative taxable income due to high deductions such as mortgage interest, medical expenses, or losses from other activities, it may make sense to convert a portion of your retirement account to a Roth. The converted portion will be declared as income, but if your taxable income is already negative you essentially use up some of your “negative income” against the conversion amount and the conversion ends up being tax-free! All future withdrawals from the Roth IRA, principal and earnings, are tax-free. Further, Roth IRAs are not subject to the traditional required minimum distribution rules, so you can continue to grow the assets in the Roth IRA after you reach age 70 and 1/2.
If you think you may be in a unique situation where you have little to negative income whether it is due to low income, high deductions, or a combination of the two, contact us at once so we can determine if this strategy might apply to you. You have until the end of the year to make the conversion and have it count for 2011.