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I am concerned. You should be too!
If you still have a Traditional IRA, all your gains are going to
be shared with Uncle Sam. Now is the time to consider converting
your IRA to a ROTH. If you also have an old/frozen employee retirement
plan that you are no longer contributing to, first move it to your
IRA, then convert it to your ROTH.
There are positives and negatives to everything, so let’s go
over them.
The Negatives
TAXES!
You MUST pay taxes in April on the value of your conversion. Remember,
it is better to pay taxes on the seed, rather than the harvest.
So the BEST time to convert is when your account is lowest in value,
and the sooner the better. Tax day is 4/15 of each year, which leaves
only months to save up for your IRA conversion taxes. Do not take
your taxes out of your IRA - pay them with other monies.
The Solutions
1) Most clients convert their whole IRA at once. That
means just one year of “biting the tax bullet”!
2) Move only a portion of your IRA each year into your ROTH, which
lowers the amount of taxes due. However, if the IRA gains value,
you still might lose, as gains means more taxes!
3) Convert your IRA to a ROTH in January, so your taxes won’t
be due until April of the following year. Divide the taxes due into
15 monthly amounts, saving 1/15 each month, so when the next Tax
Day comes, you have the taxes you need already saved.
The Positives
FREEDOM FROM TAXES!
100% of your ROTH goes to you and your loved ones. Use it anytime
after you are 59 _ and the ROTH is at least 5 years old. You can
pass it on to your children 100% TAX FREE!
It’s Easy
We have included the appropriate paperwork for you
to fill out if you decide to convert all or a portion of your IRA.
If you don’t already have a ROTH, you will have both a ROTH
Account Application as well as the Transfer Form. For security reasons,
we have not filled in your detailed personal information.
Here’s what you need to do:
1) Sign in designated areas
2) Choose Full or Partial Transfer (if Partial, enter in amount
to transfer)
We will fill in all of the rest of the information
when we receive the paperwork back from you.
***If you do not want to convert your IRA this tax year – DO
NOT return the paperwork.***
CONVERSION CALCULATIONS
No one knows exactly what your tax bill will be to convert your
IRA to a ROTH, however here are some simple calculations to give
you an estimate. Conversions are only allowed for household incomes
under $100,000.
1. THE WORST CASE SCENARIO
| $ « IRA Value » |
X
|
Your 2003 Federal Tax Bracket |
=
|
$ |
| Current value of your IRA. |
|
Joint Filers:
15% if household income is under $56,799
25% if household income is under $99,999
Single Filers:
25% if household income is under $68,799
28% if household income is under $99,999 |
|
Maximum Taxes Due |
2. THE BEST CASE SCENARIO
| $ « IRA Value » |
X
|
Your 2003 Federal Tax Bracket |
=
|
$ |
| Current value of your IRA. |
|
Divide your 2002 Total Tax (line 61) into your
AGI (Adjusted Gross Income/line 36) from the second page of
your 2002 1040. |
|
Maximum Taxes Due |
How many months before the next TAX
DAY (April 15)? Can you afford to pay the taxes then? If not, wait
until next January to convert your IRA, as then you will have 15
months until the following April 15 to save for these taxes.
This is truly a win-win-win retirement
plan!
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