Fairfield, NJ (January 4, 2011) — Now that the clock struck midnight and 2010 is officially in the books,
here are some ideas and planning strategies for Roth Conversions moving forward.
Whether or not to convert a traditional IRA to a Roth IRA is still an option for 2011. There is a big
misconception is that if you did not convert to a Roth IRA by December 31, 2010, you are no longer able to
do so. The fact remains you are still eligible to convert to a Roth IRA regardless of income limitations. The
difference in 2011 and hereafter is you are not able to spread the tax over the next two years as we were able
to do so in 2010.
What if you intentions were to convert in 2010 and procrastination was your enemy? A strategy to
accomplish the same tax treatment as you would have received for a Roth Conversion in 2010, is to do the
conversion but in two parts. Theoretically, you can convert half in 2011 and half in 2012 and accomplish the
similar objective of spreading the tax due. A word of caution is that if the non-converted portion of the IRA
performs well in 2011, you may convert at a higher value in 2012 and pay more in taxes.
Do the Roth Conversion now, don’t miss the boat again. Despite missing the December 31st deadline, we
still encourage clients who are good candidates for the conversion to move forward immediately. From a
planning standpoint, if the market goes up for 2011, than the client converted at a lower value and paid less
in taxes. If the market does not behave as we would like, than we can “Recharacterize” the conversion up
until October 15, 2012. Recharacterizing is reversing the conversion, or “take a mulligan” without any
adverse tax consequences or penalties. Therefore, there is no reason to procrastinate further.
-more-
Bradley H. Bofford,
CLU, ChFC
Financial Principles, LLC
Tax Planning for Conversions made in 2010. There was some debate last year that even if one made the
conversion, perhaps you shouldn’t defer the taxes over two years since tax rates were scheduled to increase.
Fortunately, the Bush-Era Tax Cuts were extended through December 31, 2012, so assuming one’s income is
to be presumably in the same range, it now is clear to have spread the tax over the next two years.
Creative Roth IRA Contributions for the Higher Income Earners. As we know, there isn’t an income
limitation for Roth Conversions. However, Roth Contributions have maintained an income limitation,
phasing out contributions for income earners over $169,000 who files married joint returns. If one was
interested in making a Roth Contribution but is above the earnings limit, a creative strategy is to make a
Non-Deductible IRA Contribution of up to $5,000 per person ($6,000 if over age 50) and then immediately
converts to a Roth IRA. This works exactly the same as a Roth Contribution with an additional step
involved, but assumes there aren’t any other Traditional or Non-Deductible IRA’s in the clients name,
– ### –
About Financial Principles, LLC
Financial Principles understands the importance of planning – whether it’s for retirement, saving for college
or even charitable giving. Two senior partners, Bradley H. Bofford, CLU, ChFC, and Mike Flower, bring a
combination of more than 30 years of financial services experience to their clientele. Both provide
comprehensive services and advice in all areas of personal finance, such as estate planning, retirement
planning and tax reduction strategies. Believing that a well-informed client is essential for success, they love
taking clients from fear to confidence regarding finances, by placing a strong emphasis on educating people
about how to prepare for and enjoy a comfortable retirement. Learn more at FinancialPrinciples.com.
1 To be considered a qualified distribution, the Roth IRA must have been held for at least five years and have a qualifying event such as
age 59 ½, disability, first-time homebuyer or death.
2 Different rules for state tax purposes may apply.
3 There is a two-year waiting period to convert a SIMPLE IRA.
Securities offered through Securities America, Inc. Member FINRA/SIPC. Brad Bofford, Registered Representative. Advisory services
offered through Securities America Advisors, Inc. Brad Bofford, Financial Advisor. Financial Principles, LLC and the Securities America
companies are not affiliated.
Pursuant to IRS Circular 230, Securities America Inc. is providing you with the following notification: The information contained in this
article is not intended to (and can not) be used by anyone to avoid IRS penalties. Neither Securities America nor its representatives are
permitted to give tax advice. Discussion of tax rules is for general informational purposes only and merely a summary of our
understanding and interpretation of some of the current income tax regulations and is not exhaustive; nor does it cover every situation.
Consult a qualified professional for tax advice specific to your situation.
Contact: Bradley H. Bofford, CLU, ChFC
310 Passaic Avenue Suite 203
Fairfield, NJ 07004
(973) 582-1000
Toll Free (877) 401K-529
bhbofford@financialprinciples.com