What To Do

The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) eliminates the $100,000 income limit and allows all taxpayers to convert traditional IRAs and other retirement plans to Roth IRAs beginning in 2010.

Roth IRAs can play an important role in retirement and legacy planning as they allow for tax-free growth and withdrawals and are not subject to required minimum distributions during the account owner’s lifetime.

Even though the new regulations don’t go into effect until 2010, there are a number of things to consider in 2009 in anticipation of this important change in IRA regulations.

Discuss the new conversion rules with your financial advisor and review how a Roth IRA can play a role in your retirement and legacy planning.
Your financial advisor can provide you (and perhaps your tax professional) with an overview of the new conversion rules. If the tax-free benefits of a Roth IRA are appealing, consider the following strategies in 2009.

It’s not too early to evaluate the specific benefits of a Roth conversion.
Ask your financial advisor to provide an analysis that shows the potential outcomes of converting all or a portion of your IRA or other retirement plan assets to a Roth IRA.

Make sure the analysis takes into account the special tax treatment allowed under TIPRA. State income taxes should also be part of any meaningful conversion analysis. Ask for multiple analyses that include a wide range of scenarios (conversion amounts, tax rates, retirement age, etc.).

Collaborate with your financial and tax advisors on the benefit of a Roth IRA conversion.
Collaboration between your financial and tax professional is essential. If the analysis provided by your financial advisor indicates a full or partial conversion is potentially beneficial, bring your tax advisor into the conversation. Roth IRAs are a superior way to build tax-free growth but converted assets will increase your adjusted gross income and tax liability. Your tax professional can help you determine the ramifications of conversion.

Your financial advisor can help you plan for funding the conversion, establish the Roth IRA, and develop an asset allocation strategy taking into account the tax-free aspect of Roth IRA assets.

Earmark funds to pay conversion taxes.
Work with your financial advisor to develop a plan that sets aside funds in anticipation of paying taxes on assets converted to a Roth IRA. One simple strategy is to earmark tax refunds to help pay the cost of conversion.


Fund a nondeductible IRA and maximize contributions to employer-sponsored plans.
Consider this funding strategy in 2009 if you want to maximize the amount eligible for conversion in 2010 to take advantage of the special tax treatment for assets converted in that year.

Prior to conversion, develop an asset allocation strategy for tax-free Roth assets and your overall portfolio.
As suggested earlier, no conversion strategy is complete without a clear understanding of how those now, tax-free assets will affect your overall asset allocation. How much should be guaranteed? Do you need growth or income from this tax-free account? How will this affect your taxable portfolio? Clearly, these are compelling and important conversations to have with your financial advisor.

Evaluate the impact of a Roth conversion on your estate.
As mentioned, Roth IRAs present a compelling and important aspect to estate planning. On the one hand, the cost of conversion will reduce your taxable estate (which may be advantageous in certain circumstances). The trade-off of course is Roth IRA owners are not subject to RMDs. And while non-spouse beneficiaries must take distributions, they will generally be tax-free and can be taken over the course of their lives.

The Roth IRA could grow tax-free for generations. Be sure to bring your estate attorney into the conversation with your tax advisor and financial professional.

Consider other family members who might benefit from converting assets to a Roth IRA.
Older family members faced with the prospect of required minimum distributions and the possibility of higher tax rates may be well-served to evaluate the benefits of a Roth IRA. In addition, Roth IRAs present an interesting dynamic to legacy planning given the tax-free growth and distributions they provide.

It’s never too early to develop an estate plan customized to meet unique needs. Use the new Roth conversion rules as a catalyst for other family members to consider their legacy.

Make sure your beneficiary designations are up to date.
It’s always a good idea to review your named beneficiaries to make sure they are consistent with your wishes and financial goals. This is especially so given the tremendous long-term tax advantages afforded by Roth IRAs. Use your evaluation of the new Roth IRA conversion rules as cause to evaluate all of your beneficiary designations.

Use 2009 to make the best-informed decisions in 2010 and beyond.
The regulations affecting retirement accounts are complex and can be daunting at times. However, knowing the rules and how to take advantage of them are the hallmarks of superior retirement planning. This is where your financial advisor can truly bring value to your relationship.

Regardless of your decision to convert or not, it’s imperative to evaluate the ramifications of these new regulations in the context of your planning and asset allocation strategies. Use 2009 to make the best-informed decisions in 2010 and beyond.