Convert Any Sized IRA into a Roth Starting Jan 1st, 2010
The government with a multi-trillion dollar budget deficit is opening the doors to a new Roth IRA rule starting on January 1st, 2010. Any individual or married couple will be able take their current Individual Retirement Account (IRA) and convert the full amount into a Roth IRA.
Currently rules are that converting to a Roth IRA is limited to only those households with a MAGI of $100,000 or less. This will no longer be the case. By changing Roth conversion rules the US government will earn billions in extra income taxes. Any individual who decides to move their IRA into a Roth IRA will be charged income taxes according to the total amount of the transfer (since it was initially contributed tax free).
While a regular IRA account accumulates tax free until the money begins to be withdrawn a Roth IRA has its contributions taxed upfront so the money can compound over time and not be taxed at all during withdrawal.
So for those of us who are still relatively young and have a decent sized retirement account it may make sense to convert to a Roth. Why? If we expect our tax brackets to increase later in life overall we will save money.
The two key advantages of a Roth IRA:
- All distributions are tax-free. Since taxes are paid up front you can compound interest tax free over the life of the account.
- There are little restrictions. Since you’ve paid your taxes there are no required withdrawal periods like a traditional IRA.
Roth IRAs are a phenomenal vehicle for estate planning. With no pre-set wirthdrawal period it is very common for individuals to grow a Roth IRA over the course of a life then pass on the account to family members who can continue to withdrawal incremental amounts tax free until the fund runs dry.
While this change in government policy will create an instant inflow of income for the US government we can’t help but wonder what the future holds. What happens down the road when the government realizes there are tens of billions of extra dollars sitting in Roth IRAs tax free? Will they find a way to tax these accounts even though their dues have already been paid?
My guess is yes. Just like the infamous death tax the government will surely find a way to squeeze something extra out of these popular retirement accounts.
