Larry Stone: A Roth IRA tax break |

Larry Stone: A Roth IRA tax break

Larry Stone

President Obama has just signed the “Small Business Jobs Act of 2010.” While the law focuses on expanding credit for small businesses, it includes a surprise tax break for those of you saving for retirement in employer-sponsored plans.

You already know that if you have a regular IRA, you can convert it to a “Roth” IRA. Of course, you have to pay tax on the amounts you convert. But if you convert by December 31, you can spread the resulting income over two years – include half the conversion amount in your 2011 income and the rest in 2012.

But what if you’re saving in your employer’s plan? Under new law, if your employer’s 401(k), 403(b), or 457 plan lets you make Roth contributions, now you can convert your previous contributions in those to Roth accounts, too. (Sorry, you still can’t convert your employer’s contributions.) Again, you’ll have to pay tax on whatever amount you convert. And again – unless you specify not – you can spread the income over two tax years.

If the tax you pay to convert today is less than the tax you would pay to withdraw the money tomorrow, converting makes sense. But deciding isn’t as easy as you might think. We know where tax rates are today. But where will they be next year and beyond? Even calculating the actual tax you’ll pay to convert is harder than it looks. That’s because adding the conversion amount to the rest of your income has ripple effects to consider – like phasing out itemized deductions and personal exemptions, and pushing yourself into a higher tax bracket.

Bottom line: Deciding whether to convert your retirement accounts to Roth accounts is not a do-it-yourself calculation! So if you’re curious about this opportunity at all, don’t make an expensive mistake you can avoid! I recommend seeking assistance from your financial advisor.

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