money.cnn.com
Increase Roth IRA eligibility
In order to keep the final reconciliation package under its $70 billion spending limit, lawmakers needed to add revenue raisers into the bill.
The most controversial is one allowing all taxpayers, not just those with modified adjusted gross income of $100,000 or less, to convert their traditional IRAs to Roth IRAs starting in 2010.
Proponents of the measure say it will raise revenue since IRA holders must pay taxes on their accounts when they make the conversion. By JCT estimates put out last week, the conversions will yield an additional $6.4 billion in revenue between now and 2015.
But critics say that long-term the provision will be a revenue loser for two reasons: 1) the gains earned in those accounts would grow tax free, while in a traditional IRA they would have been taxed as income upon withdrawal; and 2) those making the conversion will be advised to pay their Roth taxes upfront using money from their taxable savings, the interest and dividends from which are taxed every year. By reducing their taxable savings, they also will be reducing Uncle Sam's take in future years.
Conversions won't make sense for all upper-income taxpayers. Much depends on your current income tax rate, your anticipated income tax rate in retirement and whether you can pay the up-front taxes on the conversion with money other than that earmarked for the Roth.
"Generally, if outside funds are available to pay taxes triggered by the rollover, conversion will make sense unless the taxpayer expects to be in a substantially lower tax bracket at retirement. When conversion makes sense, the long-term tax savings can be very dramatic," said Craig Janes, a partner at Deloitte Tax LLP, in a statement.
For instance, Deloitte estimates that a taxpayer with a $200,000 traditional IRA could generate an additional $170,000 in retirement income by making the conversion, if he is in the 33 percent tax bracket but expects to be in the 25 percent tax bracket when he retires. It also assumes he makes the conversion in 2010, retires in 2025 and gets an average annual return of 8 percent on his investments.
If, however, his income tax rate in retirement were 15 percent, the conversion could cost him $102,000 in retirement income. |
