PLANNING FOR RETIREMENT: USING TRADITIONAL AND ROTH IRAS

There are many vehicles used for retirement planning. One of the most common is the traditional IRA (individual retirement account). Since the federal government does not yet recognize same sex couples, the following discussion centers on lifetime rules of IRAs. At the death of the individual, continuation rules are different for survivors who are spouses, rather than non-recognized same sex couples. With those parameters set, let’s continue.

Contributions to IRAs are often tax deductible and distributions are often taxable as income. Another type of IRA is the Roth IRA in which contributions are made after tax and distributions can be tax-free. Tax-free withdrawals can be attractive which often prompts the question: Can a traditional IRA be converted to a Roth IRA?

The answer is yes. As of 2010 there are no longer income limitations for single taxpayers and married taxpayers filing jointly. The restrictions based on the filing status of married filing separately have also been repealed.

Conversions are not considered distributions but are fully taxable. Any deductible contributions and gains will be taxable to the owner and included in income in the year of the conversion. A special deferral was available for 2010 conversions, allowing the owner to elect to include ½ of the conversion income in 2011 and the balance in 2012.

For Roth owners under age 59 ½, a special rule applies to conversion amounts. The conversion is not subject to the 10% federal income tax penalty. Any distribution of the conversion amounts, made in the five-year period following the conversion, will subject the conversion portion to the 10% penalty, unless an exception applies. This includes distributions to pay the income taxes due on the conversion. This prevents a Traditional IRA owner from avoiding the 10% penalty by first converting to a Roth IRA. Earnings on any conversions are subject to the rules related to qualified distributions (must be after Roth is open for 5 years and after 59 ½, death, disabled or first time home buyer). Generally, it is best to pay any all income taxes for the conversion from other assets.

Since 2008, employer-sponsored retirement plans can be rolled directly to a Roth IRA.

IRA transfers and rollovers are powerful financial tools. If properly handled, these transactions allow funds to be shifted between IRAs or withdrawn without paying income taxes. The end result is often greater convenience and/or greater control of funds for the IRA owner. If you think a transfer or rollover might make sense for you or your partner, contact a qualified financial professional.

0192720-00002-00, Ed 11/18/2013, Exp 05/18/2015

Provided courtesy of Prudential, Newark, NJ. For more information, contact Mark Gabriel, a Financial Professional Associate with The Prudential Insurance Company of America’s North Western Hills Financial Group agency located in Warren, NJ. He can be reached at and (908)731-4074.