Roth IRA Answers

Roth IRAs

Q. What are the benefits of a Roth IRA?

• Withdrawals
  Withdrawals of earnings from your Roth account are income tax-free as long as
  you're at least 59½ years old and have had the account for the minimum holding
  period (currently five years).
  
  Also, unlike traditional 401(k)s and IRAs, Roth accounts don't required you to
  take minimum distributions starting at age 70½. However, if you convert to a
  Roth IRA after age 70½, you still have to take one final required minimum
  distribution (RMD) from your traditional retirement account for the conversion
  year.
  
  With a Roth IRA, you also have the ability to take qualified early distributions
  without paying the early distribution penalty. Early distribution exceptions
  include, but are not limited to:
  
  
• Qualified higher education expenses.
• First-time home purchases.
• Qualified medical expenses.
• Qualified disability claims.


• Taxes
  If you think you'll be in the same or a higher tax bracket when you retire, it's
  likely that the taxes you pay on the Roth conversion today would be less than the
  taxes you'd pay on traditional IRA or 401(k) withdrawals during retirement.
  
  
• Estate planning
  By paying tax on the conversion up front, you eliminate the income tax your heirs
  would otherwise have to pay on withdrawals from an inherited traditional IRA.
  Also, because you're not required to take minimum distributions from your Roth
  account, it can continue to grow tax-free until your heirs are ready to withdraw
  the money. All non-spouse beneficiaries must take RMDs once the Roth account
  is inherited. A spousal beneficiary may delay RMDs until the date that the
  decedent would have been 70½ years old, or can treat the Roth IRA as his or her
  own.

ROTH IRA CONVERSION BASICS

Q. What is a Roth IRA conversion?
A: A Roth IRA conversion allows eligible individuals to convert their traditional
retirement assets (such as a traditional IRA or 401(k)) to a Roth IRA. Those
eligible can choose to convert part or all of their traditional retirement assets.

Q. What’s changing about Roth IRA conversion in 2010?

• The IRS is lifting the MAGI limits in 2010 (currently $100,000 or less), thereby making anyone who holds a traditional IRA account eligible to convert it to a Roth IRA.

• A conversion is usually reported as income for the tax year the conversion takes place. However, in 2010 only, your conversion amount will be split and reported as income for tax years 2011 and 2012 unless you elect to report the entire conversion amount on your 2010 taxes.

Which accounts can be converted to a Roth IRA?
A: You can currently convert traditional IRAs and certain employer-sponsored
retirement accounts (such as 401(k)s) to a Roth IRA account. However, in the
case of inherited accounts, you can only convert to a Roth IRA if you inherited
the traditional IRA from your spouse. Check with your plan administrator and
Roth IRA provider.

Q. Who can convert to a Roth IRA?
A: There is no age limit for converting traditional retirement assets to a Roth IRA.

In 2009, you're eligible to convert to a Roth IRA if your MAGI is $100,000 or
less.

In 2010, the IRS is lifting the MAGI limit, meaning everyone will be eligible to
convert to a Roth IRA.

Although the IRS is lifting the MAGI limit for conversions, it's important to note
that the MAGI limits will still apply for Roth IRA contributions (read more).

Q. Can I convert to a Roth IRA even if my MAGI is more than
$100,000?
A: In 2009, you're only eligible to convert to a Roth IRA if your MAGI is $100,000
or less.

In 2010, the IRS is lifting the MAGI limit, meaning everyone will be eligible to
convert a Traditional IRA to a Roth IRA.

Q. What is a partial conversion?
A: A partial conversion gives you flexibility to choose how much of your traditional
retirement assets you'd like to move into a Roth IRA account. Investors who
choose partial conversions instead of full conversions likely do so for one or both
of the following reasons:

• Income taxes: A full conversion, which requires you to report all of the conversion amount as income on your taxes, may end up bumping you deep into a higher federal tax bracket. If you get bumped to a slightly higher tax rate, such as from the 25% bracket into the 28% bracket, the conversion benefits might outweigh the difference in taxes. However, if the conversion causes you to move to a substantially higher tax rate, say from the 15% bracket to the 25% bracket, the increase in taxes owed could be substantial (depending on how deep into the next bracket you end up). (Note: Only the portion of your taxable income that falls into the higher bracket will be subject to the higher rate.)
  
  
• Conversion taxes: If you don't have enough cash available outside of your retirement account to pay the tax on a full conversion, a partial conversion might be a better alternative. It may make sense to figure out how much conversion tax you can pay without dipping into IRA assets, and then figure out how much you can convert for that amount of tax. Of course, if you have to sell appreciated assets in taxable accounts to pay the conversion tax (and thereby incur capital gains tax in the process), then the analysis may be more complex. You'll probably want to get some help crunching the numbers from your tax advisor or account.

Q. Can I put my converted assets into an existing Roth IRA?
A: You should be able to convert all or part of your traditional IRA to an existing
Roth IRA. Check with your account provider.

Q. Will I need to sell and go to cash to convert to a Roth IRA?
A: No. You can convert your traditional retirement assets directly into a Roth IRA
without going to cash first.

Q. Do I still have to take a required minimum distribution from my
traditional IRA if I convert it to a Roth IRA before then end of the
year?
A: If you convert your traditional retirement assets to a Roth IRA after age 70½, you
are still required to take one final minimum distribution for the year you convert
(if you haven't already done so). Keep in mind that the IRS has suspended
required minimum distribution rules for the 2009 tax year only.

Q. I've heard from one source that converting to a Roth is always a bad
idea, while another says it's always a slam dunk. So, which is it?
A: We suggest that you be wary of extreme points of view. It’s impossible for any
advisor to know a person’s unique situation—and whether a Roth would be
advantageous—without going over the person’s facts one on one. A Roth
conversion may or may not make sense for you, depending on your individual
circumstances. So, it’s best to keep an open mind.

One important point, however, is that converting today means incurring a real and
permanent tax liability now in hopes that it will pay off at some distant point in
the future. Unfortunately, you won't know for sure if the conversion was the right
move until you're ready to withdraw the money in retirement.

Q. With the stock market still well below its previous highs, is this a good
time to convert to a Roth?
A: The decision to convert has little to do with the size of your portfolio, so no
matter what effect the recent stock market fluctuations had on your portfolio, the
market shouldn't inform your decision. Instead, base your decision to convert on
an objective assessment of your current tax and financial situation and your
reasonable expectations for your future tax bracket.

For example, let's say you have a $100,000 traditional IRA. After running the
numbers, you find that it doesn't make sense to convert to a Roth IRA because
you believe you will end up with more money 20 years from now by leaving your
traditional IRA alone. If that same IRA was to drop 20% because of stock market
volatility but your circumstances remain the same, you should still leave it alone.
If your analysis turns out to be correct, you’ll still end up with more money at the
end of the day by leaving the traditional IRA where it is.

Of course, if you were previously planning to convert because a Roth conversion
made sense for you before the decline in the value of your account, then go ahead
and convert, provided it remains advantageous given your personal
circumstances.

Likewise, if you previously converted to a Roth and the value of your conversion
balance subsequently declined, you can undo the transaction via the
recharacterization process described below, and then reconvert after the required
31-day waiting period.

Finally, it's important to remember that you don’t have to convert your entire
account. If you were planning on making a partial conversion of a fixed amount
anyway, it shouldn’t matter what the stock market is doing.

Q. How do I switch or convert to a Roth IRA?
A: If you already have your accounts managed by TCS Financial Services we will contact you to discuss the conversion , or you can call us at 877-827-4685 to get started today.

If you hold a traditional IRA at somewhere other than Schwab, you have two
options:

• Transfer your IRA to an identical IRA at Fidelity or TD Ameritrade. When the transfer is complete, you can initiate the conversion to a Roth IRA.
• Convert your traditional IRA to a Roth IRA while still custodied at your other institution. When the conversion is complete, you can then initiate the transfer of your Roth IRA to a Fidelity or TD Ameritrade Roth IRA.

Q. Is there a deadline for converting?
A: No, there is no deadline for converting. However, you must convert in 2010 if
you'd like the conversion amount to be split equally between your 2011 and 2012
tax returns. (Keep in mind that, your personal situation aside, based on current
law, federal income tax rates are likely to rise after 2010). If you convert after
2010, the entire conversion amount will be reported as income in the tax return
for the year you convert.

IRA CONTRIBUTIONS

Q. Where can I find my pre-tax contributions?
A: For a traditional IRA, you've likely been keeping track of your cumulative non-
deductible traditional IRA contributions all along on .

Q. How do I know how much non-taxable contributions I have in my
current account?
A: If you've been keeping track, your most recent IRS Form 8606 will contain the
amount of non-tax deductible contributions.

Q. Can I contribute to my Roth IRA once I’ve converted?
A: Although the IRS is lifting the modified adjusted gross income (MAGI) limit for
Roth IRA conversion in 2010, the MAGI limits for Roth contributions still apply.
There is a potential loophole, however. As the law currently stands, starting in
2010, high income earners otherwise not eligible to make Roth contributions
could make nondeductible contributions to a traditional IRA and then convert to a
Roth the next day with no federal tax consequence whatsoever. It's likely that this
isn't want Congress intended, however, so we wouldn't be surprised if Congress
writes some sort of anti-abuse provision into the law to prevent high earners from
taking advantage of this loophole.

2009 Roth IRA contribution limits

• Single individual: If you're a single tax filer, you can make the maximum-allowed contribution to a Roth IRA if your MAGI is below $105,000. If your MAGI is between
  $105,000 and $120,000, then you can contribute some amount less than the full limit. If your
  MAGI is $120,000 or above, you are not eligible to contribute to a Roth IRA for 2009.

• Married individuals filing jointly: In this case you can contribute to a Roth IRA, up to a limit, if your MAGI is below $166,000. If your MAGI is between $166,000 and $176,000,
  then you can contribute some amount less than the full limit. If your MAGI is $176,000 or
  above, you are not eligible to contribute to a Roth IRA for 2009.
  Keep in mind that contributions limits will likely change in 2010. For more
  information, see on www.irs.gov.

IRA RECHARACTERIZATION

Q. What is a recharacterization?
A: A recharacterization (correction) allows you to reverse an IRA transaction (either
a contribution or conversion) under a variety of circumstances. For example:

• Contributions: Maybe you made a contribution to a traditional IRA but later decide
  you want to switch it to a Roth. Or you made a contribution to a Roth IRA early
  in the year but later earned too much to qualify. Or your income turned out to be
  lower than you thought, and you want to switch to a traditional IRA because you
  can now deduct the contribution after all. The reason doesn't matter. The
  recharacterization rules allow you to reverse the transaction.
  
• Conversions: Maybe you made a conversion from a traditional IRA to a Roth IRA,
  but the market fell dramatically after your conversion, and you want to reverse
  the transaction to reconvert at a lower balance to reduce your tax bill. Again, the
  reason doesn't matter.

For more information, see the . The details can get complex, especially when a partial recharacterization is involved, IRS Form 8606 2009 IRA Contribution and Deduction Limits
recharacterization instructions for IRS Form 8606 so check with a retirement consultant and your own tax professional concerning your situation. Importantly, keep in mind that there is a deadline: You can make a recharacterization only until October 15 of the year following the calendar year in which you originally contributed or converted.

Q. Can I recharacterize and then reconvert an IRA?
A: Yes. If you have recharacterized your Roth IRA back to a traditional IRA, you
may be able to reconvert to a Roth IRA. You should consult a tax advisor to more
fully understand the rules surrounding reconversions, including the required
waiting period.

TAXES

Q. What are the federal income tax implications of converting?
A: You will have to pay income taxes on the taxable amount you convert to a Roth.
The taxes you pay on the conversion will be calculated based on your marginal
income tax bracket and the amount of money you convert from your traditional
IRA or 401(k). A conversion is usually reported as income for the tax year the
conversion takes place. However, there's a special rule in place for 2010 only:
Your conversion amount will be split and reported as income for tax years 2011
and 2012 unless you elect to report the entire conversion amount on your 2010
taxes.

If you want to convert all of your traditional retirement assets, you don’t have to
do so at once. If you're worried that converting all of your assets in 2010 will
bump you deep into a higher federal income tax bracket, work with your
accountant to figure out how much you can convert each year without bumping
yourself too far into a higher tax bracket, as doing so could outweigh the potential
benefits.

If you convert to a Roth IRA, you’ll need to complete IRS form 8606 to report
your “basis” (if any) in your traditional IRA and to report your taxable conversion
income to the IRS.

Q. What are the state income tax implications for converting?
A: Even in states with high tax rates, the top tax bracket kicks in at a lower income
level than the federal bracket does. Therefore, the likelihood of moving from a
significantly higher to lower (or lower to higher) state bracket based on a change
in future income level is less than in the case of federal taxes.

State rates also tend to change less frequently. Of course, tax law can vary
significantly from state to state, so you need to take your own situation into
account. If you do end up in a lower or higher future state income tax bracket,
that likely wouldn’t change the basic decision to convert or not, just the
magnitude. If a conversion does or doesn’t make sense at the federal level, a
change up or down in state taxes would probably just make it better or worse in
absolute terms.

To keep things in perspective, compared to the highest income tax rate in most
states, federal taxes are a much more significant factor in your decision to convert
to a Roth or not. That said, moving from a low- or no-income-tax state to a high-
tax state (or vice versa) might influence the decision. For example, if you make a
future move from a high-tax state like New York or California to retire in a state
with no state income tax like Texas or Nevada it would work against the decision
to convert beforehand. Conversely, a move in the other direction would favorably
impact your analysis.

Keep in mind that states don't always conform to federal tax law on every
provision. Check with a tax professional who is familiar with your state’s rules.

Q. Why is it so important to pay the conversion tax from money other
than my retirement account? Why not just pay the taxes out of my
traditional IRA?
A: If you're under age 59½ and you use some of your traditional IRA money to cover
the tax on the conversion, you could end up paying a 10% federal early
distribution penalty. (State penalties may also apply.) In addition, if you pay the
taxes from your IRA, you will lose the potential benefits of tax-free growth on
that amount.

Another factor to think about: If you paid taxes from your IRA at the time of
conversion, then there would be no advantage or disadvantage to converting no
matter how long the time horizon (the number of years before you started
withdrawing money from the Roth), assuming your present and future tax rates
are the same. For example, consider the following hypothetical scenario:

Traditional IRA balance = $1,000
Current federal income tax rate = 25%
Future federal income tax rate = 25%

If you pay the 25% conversion tax using IRA funds, you are left investing $750 in
your Roth. Assuming an average annual return of 6%, after 20 years you will
have $2,405 in your Roth. If, instead, you left your traditional IRA alone and
earned the same return, you would have $3,207 after 20 years. Assuming the
same tax rate of 25%, you would end up with exactly the same amount after
withdrawing the money and paying $802 in federal income taxes: $2,405.

Of course, converting to a Roth would be worse if you were under 59½ at the
time of conversion and used IRA funds to pay the tax since you would also incur
a 10% federal penalty (state penalty and taxes may also apply).

You still need to account for the “opportunity cost” of paying the conversion tax
with funds available outside of your retirement account, since that money could
have been invested all along if you just did nothing and left your traditional IRA
alone.

However, as you factor in the hypothetical opportunity cost in your analysis,
remember that the ongoing return lost to taxes each year and long-term capital
gains tax at liquidation of these outside funds are likely less than the ordinary
income tax rate you would incur on a future withdrawal from a traditional IRA
(which is why there would be a slight advantage with the Roth conversion if you
paid the conversion tax with outside funds, even if the future tax bracket
remained the same).

Q. What are the chances that the tax-free nature of a Roth IRA will be
reversed?
A: At this time there is no indication that the Roth IRA's tax-free nature will be
eliminated. Of course, tax law is subject to change, so a key part of any decision
to contribute or convert to a Roth IRA is what you expect your current and future
income tax rates to be. Keep in mind that your future income tax rate does not
simply depend on your expected level of future taxable income, which is difficult
enough to project. It also depends on the tax brackets that may or may not be in
place far into the future, not to mention whether our current overall tax system
will continue to remain in place (for example graduated tax rates vs. flat tax).

Q. Given government deficits and the likelihood that income tax rates
are heading higher, is now a good time to convert to a Roth IRA?
A: Unless government spending is reduced dramatically, the general consensus is
that taxes can only go higher at the federal, state and local levels. Of course, there
is a limit at which higher taxes would have a negative effect on the economy,
defeating the goal of higher revenue collection. If combined income tax rates
(federal, state and local) rise too much, economic activity could fall significantly,
paradoxically reducing overall tax revenue.

Policy aside, whatever happens with respect to future tax rates and spending at
the federal, state, and local levels, the best you can do is to create a plan based on
what you know now about current tax law and where you expect to be personally
with respect to future income. While the future may be impossible to predict with
absolute certainty, you likely have a better idea of your future situation than of
what the federal or state governments might do.

Assuming our current system of graduated tax brackets based on personal income
levels remains in place, you will still have a lot of control over how you structure
your income. For example, if you have a large retirement portfolio, you can place
tax-free municipal bonds and assets that generate long-term capital gains in your
taxable accounts so that your marginal tax bracket in retirement ends up being
much lower than during your working years—which would make a Roth
conversion now less attractive.

On the other hand, your traditional IRA balance may be so large that required
minimum distributions (RMDs) starting at age 70½ would push you into a much
higher income tax bracket—which would favor a Roth conversion now.
Because the future of taxes is so uncertain, it might make sense to extend your
diversification policy beyond stocks, bonds and cash to include diversification
based on tax treatment, as well. By holding some money in a taxable account,
some money in a traditional IRA, and some money in a Roth, you can better
manage your future retirement cash flows to take advantage of whatever happens
to the tax structure or your personal situation.

Just as you should not put all your investment eggs in one asset basket, you need
to be careful about taking an all-or-nothing approach with respect to the type of
retirement accounts you chose.

Q. Is the 2-year payment of Roth IRA conversion taxes a one-time deal?
A: Yes. In 2010 only, your conversion income will be split evenly and reported on
your 2011 and 2012 federal income taxes unless you elect to include the entire
amount on your 2010 taxes instead (which might not be a bad idea if you expect
your marginal tax rate to increase in 2011). However, you must convert by
December 31, 2010, to take advantage of the 2011/2012 split.

Q. Do I need to pay taxes on traditional IRA gains when I convert to a
Roth?
A: Yes. When you convert your traditional IRA to a Roth IRA, you must pay taxes
on the amount converted from pre-tax contributions plus any investment gains. If
you've made nondeductible contributions to your traditional IRA in the past
(hopefully, tracked all along on IRS Form 8606), you can't pick and choose which
portion of the traditional IRA money you want to convert to a Roth.
The IRS looks at all assets within a traditional IRA as a whole when it comes to
distributions, including Roth conversions. Traditional IRA balances are combined
so that the amount converted consists of a prorated portion of taxable and
nontaxable money. For more on the aggregation rule, see .

ESTATE PLANNING

Q. Can converting to a Roth IRA be beneficial as an estate planning
tool?
A: Yes. Many people will want to consider converting to a Roth IRA for estate planning
purposes, as there are a number of potential benefits:

• Unlike traditional IRAs, Roth IRAs don't require people age 70½ or older to take minimum distributions, which means your account can continue to grow tax-free until your heirs are ready to withdraw the money. If your spouse inherits the Roth account, he or she will not be required to take any minimum distributions, either.
• By paying the conversion tax up front, you eliminate the income tax your heirs would otherwise have to pay on withdrawals from an inherited traditional IRA.
• Converting to a Roth will reduce your taxable estate by the amount of income tax you pay to convert. The Roth IRA balance will still be included in your taxable estate.

Q. If I leave my Roth to my heirs, will they have to pay income taxes
when they take withdrawals?
A: Under current tax law, no. Because you paid the income taxes up front on your
contributions or when you converted, your heirs will not incur any further income
tax on the inherited account. The Roth IRA balance is included in your taxable