Tax rates will be increasing (both federal and state)

Clients need you NOW to create a plan to minimize or eliminate FUTURE taxes.

Roth IRA Benefits

  • Tax free income in retirement – keeping taxable income low, even when taxes increase
  • No required distributions for Roth IRA owners
  • Roth IRA conversions can be undone (a re-characterization) up to October 15th of the year following the year of the conversion
  • Roth IRA funds pass income tax free to beneficiaries
  • Roth IRA beneficiaries can stretch tax free distributions over their lifetimes (but RMDs must be taken by non-spouse Roth IRA beneficiaries)
  • It is likely that income tax rates will increase in future years making tax-free Roth IRA income more valuable
  • Roth IRAs remove that uncertainty of what future tax rates might be

“Back-Door” Roth IRA Conversions
Although the income limitations for Roth conversions are repealed, the Roth IRA contribution income limits still exist, but can easily be bypassed by making a traditional IRA contribution and then doing a conversion to a Roth in the same year.

High-income clients can make non-deductible contributions to traditional   IRAs and then convert those traditional IRAs to Roth IRAs (the pro-rate rule will apply).

Unfortunately though, this strategy only works for clients who are younger than 70½ and have earnings. Although contributions can be made to a Roth IRA at any age (as long as clients have earned income), contributions to a traditional IRA cannot be made after reaching the year they turn age 70½.

3 Cautions When Using this Strategy:

  1. Must have earned income – such as wages, self-employment income
  2. Cannot be over age 70½ (IRA contributions can no longer be made for the 70½ year and later years)
  3. The funds that end up in the Roth IRA through a back-door conversion are converted funds, NOT Roth IRA contributions. This makes a difference for those under age 59½ who must wait 5 years for penalty-free access to those funds. If the funds went in as Roth IRA contributions, they would be accessible immediately, tax and penalty-free.

Disclosure: Roth IRA distributions are tax free if made 5 years after the initial contribution to the plan and you are over 59 1/2.