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Many consumers are worried about how to protect themselves from potential 2013 tax hikes. We talked with Certified Financial Planner Rick Rodgers, who discusses how to handle the potential changes coming next year. Please consult your own financial planner or tax advisor before acting.
Q: How will a tax hike in 2013 affect IRAs, and why should people consider converting from a traditional IRA to a Roth IRA?
Tax rates may or may not go up in 2013, but it is highly unlikely they will ever be lower than 2012 rates. Converting in 2012 will create a taxable event at today’s low rates, avoiding distributions later when tax rates are possibly higher.
Q: Are there any circumstances under which converting from a traditional IRA to a Roth IRA would not be advisable, even with a tax hike in 2013?
Anyone who has a significant tax event already happening in 2012 (a large bonus, exercised stock options, a large capital gain) should probably not convert.
Q: What potential complications can arise from converting?
Those who itemize deductions could lose some of those deductions. Social Security benefits could become taxed. Medicare premiums could increase. It’s important to do tax projections to determine the optimum amount to convert.
Q: What is an advantage to doing a Roth conversion before 2013?
It’s a chance to pay tax at lower rates on income that will eventually be taxed, especially for anyone that is going to be subject to the new Medicare tax under the health care reform. Distributions from IRAs are not subject to the tax, but taking them could push other income over the threshold. Converting an IRA now will avoid (or lessen) those forced distributions at age 70 ½.
Q: Will any penalties or fees be incurred for undoing the transaction?
There are no IRS penalties or fees for undoing the transaction as long as it is completed before the filing deadline. The deadline is normally April 15, but it can be extended to October 15.
Q: Why is a Roth conversion one of the best tax-planning strategies available now?
The conversion can be undone as late as October 15, 2013, which gives the taxpayer a chance to see what will happen with the tax laws after the election.
Q: What if the conversion causes one’s income to exceed $100,000?
Everyone is now free to convert a traditional IRA to a Roth. The $100,000 cap on adjusted gross income (AGI) was lifted in 2010.
Q: What is the easiest way to convert to a Roth IRA?
Assuming the investments in the IRA are still performing well, simply move the existing investments from the IRA to a Roth. Conversions do not have to be done in cash like Roth contributions.
Rick Rodgers is a Certified Financial Planner and president of Rodgers & Associates in Lancaster, PA. He is a Certified Retirement Counselor and a member of the National Association of Personal Financial Advisors. Rodgers has been featured on a national radio and TV shows, including FOX Business News and the 700 Club. Find him at www.RodgersSpeaks.com.
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