Show #374 Airing Sunday, February 11, 2007
Death and taxes might be inevitable but another certainty is that tax laws change and you might need to change your financial game plan, too. Here to “convert” our thinking about IRA conversions and options is our financial quarterback Jim Lineweaver, founder of the Lineweaver Financial Group.
Question: Why have a Roth IRA?
Answer: A Roth IRA does have its advantages. For example, money taken out of Traditional IRA is taxed as ordinary income. Funds taken from a Roth IRA are tax free, as long as the account has been open for 5 years and the owner is over 59 ˝.
Question: I understand that, currently, there are some income limits in IRA conversions or to contributions to Roth IRAs.
Answer: Presently, if adjusted gross income (AGI) is over $100,000, you cannot convert IRA to Roth.
If you are single and income is above $110,000 or married and filing jointly and income is above $160,000, you cannot make contributions into a Roth IRA.
You can however make contributions to a Traditional IRA. But if your income is too high, you cannot deduct those contributions. In 2007, if married filing jointly and AGI is above $100,000, you cannot deduct the contribution to your IRA.
Since you can't deduct the contribution, when you withdrawal money from the account, only the gains are taxable, not the non-deductible contributions you made.
Question: Now I hear that tax law changes in 2006 may change these limits?
Answer: With the changes in the tax laws for 2006, starting in 2010 you can convert a Traditional IRA to a Roth IRA no matter what your income level.
So, now take it one step further and plan for the future. Open a Traditional IRA now, make non-deductible contributions, and in 2010 convert the Traditional IRA to a Roth IRA. When converting, you will only pay tax on the gain between the time of the non-deductible contributions and the time of conversion. After that point when you withdrawal money from your account, it is all tax free.
Now all that said, that doesn't mean that if you currently have a Traditional IRA, and you have made deductible contributions into it for years, but are not presently able to convert it to a Roth IRA because of your current income you should run out and convert it to a Roth in 2010. By doing so, ALL of the money being converted is taxable. You need to look at the tax implications and how long it will take you to break even on the conversion. That could be a topic for a future show.
Should you convert your IRA? We'll have a "convertsation" about that next week. If you'd like more information on how the new tax law affects your investment, and how you can best make your money grow, give Jim a call.
