THE VIRTUS VIEW

Time To Ring In 2010! 

My staff and I would like to wish a happy and prosperous new year to you and your families. 2010 is the year of the opportunity and we want to help you take advantage of them this year. 

The biggest financial opportunity this year may be the Roth IRA conversion tax rules. As many know, the tax rules in 2010 changed allowing investors even with large incomes to convert IRAs into Roth IRAs. Since this is such an important opportunity in 2010 we have written a detailed article on Roth IRA conversions that will be printed in our 1^st Quarter Virtus Wealth Management Newsletter (to be mailed later this month). The decision whether or not to convert an IRA to a Roth IRA is not as easy of one as most media outlets make it out to be. In reality this is a great opportunity for financial advisors to acquire new accounts. Trust me; this will be a big marketing campaign for many advisors and financial institutions.

Unfortunately, I fear investors may be led down the path to convert a Roth IRA even though financially it is not in their best interest. We follow a process to analyze each client’s specific needs, tax situations, and long-term goals to determine if it is in their best interest. Call us at 817-717-3812 if you would like for us to run the analysis for you.

There is an opportunity for a Roth conversion that exists but is not known by many investors. Current tax laws allow a $5,000 IRA contribution in 2010 with a catch up of $1,000 if you are over 50. However, those are reduced at a significant rate starting at a salary of $55,000 and up for single filers and $89,000 and up for married filing jointly (if the investor has a 401k, 403b, etc at their work).   Any amounts not within those limits are after-tax contributions (which significantly reduces the advantages of a IRA).  What an investor can do in 2010 is contribute after tax dollars into an IRA and then immediately convert that into a Roth IRA with minimal, if any, tax implications; making an after-tax contribution attractive to many investors for the first time.  For example, if an investor first contributes $5,000 into an after-tax IRA and invests that money into a money market fund, and then immediately converts that into a Roth IRA, the tax implication will only be the amount of interest earned on the money market funds for the time that it is in the traditional IRA.  For this strategy to work as described the investor cannot have non-Roth IRAs that have balances in them. 

 

Thus, one could possibly contribute $5,000 into a Roth IRA in 2010 (plus an additional $1,000 catch up if over 50) but also contribute more into the Roth IRA by just first putting the funds into an after-tax IRA and then converting it back into the Roth. This does not even include the opportunity, if it is right for your specific situation, to convert existing traditional IRAs into a Roth IRAs. 

 

As I stated above, please look out for our upcoming newsletter which will dig into the Roth IRA conversion opportunity in more detail.

 

Best Regards,