Update on May 12, 2006.
The tax bill passed and there is good and bad news here. The waived income limit on Roth IRA conversions break was included, but the start date is 2010 only.
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May 3, 2006
Today's Wall Street Journal (5/3) reported that a temporary new
tax deal is in the works to allow Roth IRA conversions without regard to an
income limit for a one or two year period. Get it while it’s hot!
The current tax law only allows Roth IRA conversions if a taxpayer’s income is
under $100,000; which rules out many wealthier taxpayers.
What’s the allure of a Roth IRA? Convert a tax-deferred retirement plan into a
permanently tax-deferred retirement plan, simply by converting a regular
retirement plan into a Roth IRA.
With regular retirement plans, you only defer taxes until your retirement years.
When you can least afford to pay high taxes, you are forced to pay taxes on
your retirement fund distributions. Plus the way the budget problem is going;
Congress may be forced to raise tax rates just when you retire. Consider that
tax rates are at historic low rates and the tide is turning back towards higher
rates.
Conversely, with a Roth IRA, you benefit from permanent
tax-deferral as opposed to only timing benefits with regular retirement funds.
There are some catches with Roth IRAs and conversions but they remain the best
deal in town for many taxpayers.
You don’t get tax deductions for Roth IRA contributions, since you don’t pay
taxes later on the distributions. That’s fair.
When you convert a regular IRA to a Roth IRA you need to square up with the IRS
and your state. The converted amount (less any basis) is treated as an “early
withdrawal” and subject to income tax. But consider that you are paying at the
current low tax rates which may be increased soon. Most importantly, all future
build up in the accounts will be permanently tax-free.
Unlike other early withdrawals from retirement plans, the
Roth IRA conversion is not subject to that nasty 10% excise tax penalty.
As far as the federal and state governments are concerned, Roth IRA conversions
are a good deal of sorts and a quick fix. They plug immediate revenue
shortfalls in exchange for future shortfalls.
For the Bush White
House and GOP it's a master stroke in the tax change battles!
The GOP could not successfully change the tax code to free up portfolio income
from taxation; although they tried hard on a number of occasions.
Now with this simple nonchalant rule change, the GOP may be
achieving tax change victory.
It’s a master stroke in the face of widespread Democratic opposition
to tax changes at this stage of Bush’s precarious political life.
Consider why. The Bush White House has been pushing hard for “loud” tax change
to free portfolio income from income taxation. In 2003, the GOP tried to free
qualifying dividends from taxation. As a negotiated compromise to tax war,
qualifying dividends were afforded long term capital gains rates and those
rates were also reduced to 15% from 20%.
This move makes great sense. Ask yourself, what is
permanently tax-free now and the answer is Roth IRA accounts. By relaxing the
income test rule for Roth IRA conversions, wealthy (GOP type) taxpayers can
free up their retirement plan portfolio income growth from future taxation. Bingo the same desired
result!
This “soft” rule change is not “loud” and it therefore it should not awaken a public outcry. But it can be just as effective; minus the
political kudos’ points.
Its smart tax negotiations for the GOP. Currently, they don't have the political capital to continue pushing their prior tax change agenda, so going through a back door makes more sense. The Roth IRA conversion
tax payments may be a good tease to win Democratic approval.
This rule change will be great news for
traders.
Traders usually outperform other types of taxpayers in trading and growing their retirement plan accounts. With Roth IRAs, traders have a good opportunity to actively trade for profit in these accounts with zero future taxation.
URL for
this WSJ article:
http://online.wsj.com/article/SB114661294217641978.html
For more about retirement plans for traders, see http://www.greencompany.com/Traders/TraderRetirement.shtml
If you have questions about Roth IRAs and retirement plans, consider a consultation with our firm.
Thank you.
Robert A. Green, CPA & CEO
GreenTrader companies
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