Tax deal presents a short-term Roth IRA opportunity

Tax deal presents a short-term Roth IRA opportunity

With the extension of the Bush tax cuts being signed into law, a certain provision of Roth IRA conversions may become more attractive.

Clients who convert a Traditional IRA to a Roth IRA before the end of 2010 may choose to pay the tax on the conversion either in its entirety this year or to spread it out in two equal amounts over the next two tax years.

But time is running out on this provision, which is set to expire at the end of this month.

Before the compromise, the scheduled expiration of the Bush tax cuts threatened an immediate increase in income tax rates in 2011. For some clients who faced higher taxes, taking advantage of 2010’s tax rate by reporting income from a Roth conversion this year may have been more beneficial.

Now that current tax rates will remain in place until 2012, spreading the Roth conversion tax over two years may be more valuable. Clients could defer reporting the income and still benefit from low tax rates in 2011 and 2012.

It is also important to note that because the Roth provision expires at the end of the month, you should contact clients as soon as possible to let them know about this opportunity.

Learn more with our Converting a Traditional IRA to a Roth IRA investor education piece. For more planning ideas, read Advanced Strategies Using a Roth IRA Conversion.

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