The New York Times, December 25th, 2009
WITH 2010 a few days away, there are several tax matters
that wealthy investors need to consider next year. The two at the top
of the list are whether they should convert their taxable retirement account to a tax-free Roth individual retirement account and how to deal with the uncertainty over the estate tax.
“There is frustration due to the legislative uncertainty,” said
Daniel Kesten, partner in the private client services group at Davis
& Gilbert, a tax firm. “Congress had eight years to address this,
but they waited until the last year when two wars and health care
interrupted their thinking.”
That leaves the wealthy with decisions to make about two of the biggest financial events of their life: retirement and death.
ROTH CONVERSION
Starting in 2010, there will no longer be an income limit for Roth
I.R.A.’s, which allow people to contribute post-tax money that can
appreciate tax-free. The income limit has been $100,000 a year for
individuals. The question is whether
converting an existing I.R.A., the proceeds of which are taxed when
distributed, into a tax-free Roth I.R.A. makes sense.
While
Congress approved the change in 2006, the opportunity to convert seems
to come at an enticing time. Those whose pretax retirement accounts
lost a lot of their value in the last two years might want to withdraw
the money, pay tax on the amount and then put it into a Roth. For
wealthy investors who do not see themselves falling into a lower income
tax bracket at retirement or who believe tax rates will rise
significantly, this could be a shrewd move.
But this requires a
degree of omniscience that few showed with the recession that began in
December 2007. “Why bother?” asked Tony Guernsey, head of national
wealth management at Wilmington Trust.
“Is it that much money?” He used the example of buying a Treasury bill
with a week to maturity: you know the government will pay you back. But
the same cannot be said for what the tax landscape — or your wealth —
will look like when you retire.
The bigger benefit may come to
people who plan to pass their Roth on to heirs. Unlike regular
retirement accounts, there is no minimum distribution requirement with
a Roth, and the tax-free treatment of its assets can be passed to an
heir. “The real benefit is coming in the estate planning aspects,” said
Mitch Drossman, national wealth strategist for Bank of America
private wealth management. “The beneficiary must take minimum
distributions. But it will be growing tax-free and distributed
tax-free.”
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