Roth IRA, how to win in 2010!
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by: radonstancil
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Word Count: 370
Date: Mon, 11 Jan 2010 Time: 5:58 PM
Raleigh NC, If you don't know already, 2010 represents a terrific opportunity for Roth conversions. Here are two little-known but, very powerful and very cool rules that can make your Roth conversion work like a charm.
Cool Rule #1: Re-characterization
Did you know that you can convert your IRA to Roth IRA in 2010 and change your mind as late as October 15, 2011? That's a long time to see what happens to your IRA values!
What if your new Roth IRA goes down in value over that time frame? Let's say you had $100,000 in your IRA, you convert to Roth (and then owe tax on $100,000, split over 2011 and 2012 tax years), but by October 15, 2011, it's only worth $75,000?
Do you want to pay tax on $100,000 Roth Conversion when your new Roth IRA is only worth $75,000? Of course not!
So you re-characterize your new Roth back to a regular IRA, in essence, changing your mind. And your tax obligation on $100,000 conversion is reversed.
Then, on January 1, 2012, you convert back to a Roth again, but this time owing tax on the now-lower IRA value of $75,000 (assuming no growth between October 15 and December 31).
Cool Rule #2: Multiple Roth IRAs
Another cool rule is that you can set up a separate Roth for each investment you have. Why would you want to do this?
Well, is it possible that by October 15, 2011 (re-characterization deadline from above) that some of the investments in your portfolio are up and some are down? Of course!
So what should you do?
Keep the ones that are up in Roth IRA status. You will owe tax on the lower value when you did the original conversion.
Re-characterize the ones that are down in value. Convert them back to Roth in January 2012 to pay tax on a lower conversion amount, and then you have until October 15, 2013 to change your mind on this group.
Continue this process until all IRA's are converted to Roth.
Note: once you decide to keep the IRA as a Roth IRA, you can then combine your various investments into one consolidated Roth IRA for simplicity.
About the Author
Radon Stancil, is a CERTIFIED FINANCIAL PLANNER™ as well as a successful financial strategist, lecturer, and consultant. Radon co-owns Diversified Estate Services, LLC a comprehensive financial planning firm. He is a member of Ed Slott’s Elite Advisor Group™ dedicated to solving the country’s biggest and most complex problem – effectively managing the distribution of assets from Individual Retirement Accounts (IRAs). His office is located at 4101 Lake Boone Trail, Suite 122, Raleigh NC 27607. You can call him at 919-787-8866 or visit his website at www.desllc.org.
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