Roth IRA conversions spike sharply blogs.marketwatch/encore/2013/11/05/roth-ira-conversions-spike-sharply/ Roth IRAs are a potent weapon retirees can use to minimize their taxes in retirement. According to new data from Fidelity Investments, they seem to be catching on. Through Oct. 31, Roth conversion activity at Fidelity rose 12% over the same period last year. The conversion rate is more than double that of 2009. Because it oversees about 2 million investor accounts, Fidelity’s reports on its accountholders activities are often seen as a good proxy for what’s going on among retirement savers in general. “We’ve seen monthly conversions regularly coming in higher than last year by 10% to 15%,” says Ken Hevert, vice president of retirement products at Fidelity Investments. “We expect that trend to continue.” What’s behind the rising numbers? One factor, according to Hevert, is simply a growing awareness on the part of investors about the ability to convert assets from a regular IRA to a Roth IRA. (Withdrawals from a regular IRA in retirement are generally taxed as income; withdrawals from a Roth IRA are not.) Not everyone can contribute directly to a Roth IRA: For individuals whose modified adjusted gross income for 2013 is $127,000 or more, Roth contributions are off-limits. For couples who file joint tax returns, the cutoff is $188,000. (You can figure out your modified adjusted gross income using a work sheet on page 59 of Publication 590 at irs.gov.) But thanks to a 2010 decision on the part of Uncle Sam to scrap income restrictions on Roth IRA conversions, anyone can convert – or transfer – money from a regular IRA to a Roth IRA. (Of course, when you do so, you must pay income tax on the money you move in the process.) As a result, higher income people have been using a “back door” method of funding Roth IRAs – and this is goosing Fidelity’s conversion numbers. The method: To contribute after-tax dollars to a traditional IRA and then immediately convert that money to a Roth. Assuming you convert before there is any appreciation in the account, you won’t owe any income tax on the conversion. Still, there is a big caveat: While this strategy works well for customers who don’t have any pre-existing IRA assets, those with traditional IRAs will be required to pay some tax on the conversion. The reason, as I explained a while back for The Wall Street Journal: Under the “pro rata” rule, you can’t convert only your nondeductible contributions. To estimate your potential tax bill, first calculate your “basis.” Expressed as a percentage, this is the ratio of two numbers: the after-tax contributions you have made to your IRAs, and the total balance in all your IRAs. For example, if you contributed $40,000 after tax to your IRAs and have a total of $250,000 in those accounts, your basis would be 16% (or $40,000 divided by $250,000). So, if you plan to convert $100,000 to a Roth, 16% of that $100,000 (or $16,000) could be transferred tax-free.
Posted on: Thu, 07 Nov 2013 19:00:38 +0000
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