At this point, many of your clients are likely aware of the benefits of Roth IRAs — tax–free withdrawals in retirement, no required minimum distributions, the option to leave an income–tax–free legacy to the next generation — but have been reluctant to convert their eligible traditional retirement accounts. For those clients, here are two important reasons to consider a conversion before the end of 2010:
Your clients’ personal income tax brackets could be higher in 2011
In order to report the income from a Roth IRA conversion on a 2010 tax return, the conversion must be completed before the end of the year. Given the uncertainty surrounding whether the Bush tax cuts will be extended for some — or any — taxpayers, it may be beneficial for clients to realize the income from a Roth conversion at 2010’s potentially lower tax rates.
The option to spread taxes over two years is a one-time opportunity
Remember that clients have a one–time opportunity to spread income from a conversion completed in 2010 pro rata over 2011 and 2012. Deferring half the tax payment provides time for clients to help finance the cost of conversions. In addition, splitting the income equally over two tax years may allow clients to avoid “bracket creep” and subjecting themselves to higher tax rates.
For clients who are hesitant to convert because of the potential negative income tax implications or are simply unsure of the amount to convert, remember that there is always the option of recharacterizing all or part of a Roth IRA conversion before the clients’ tax filing deadline without additional taxes or penalty.