To Roth or Not to Roth
Several Considerations Are Involved -
Many Monmouth County residents will be facing a dilemma in 2010—they will be newly eligible to convert their traditional Individual Retirement Account (IRA) into a Roth IRA. Prior to 2010, taxpayers with Adjusted Gross Income greater than $100,000 were not eligible to make this conversion.
Executing a conversion requires recognizing the gain on an existing account, paying the tax in current dollars (in 2010 or half in 2011, half in 2012) for the right to eliminate income tax on future withdrawals.
Ahhh, Retirement
To provide funding for that long period of unemployment also known as retirement, many of us will rely on a combination of part-time employment, Social Security, accumulated savings, retirement plans (401(k), 403(b) etc); a lucky few will enjoy a traditional pension, with its guaranteed payments and survivor benefits.
The sum of these income sources will likely be lower than employment earnings. Many will fill the gap with a) reduced standard of living; b) continued employment; c) accelerated depletion of assets; d) all of the above.
Conventional Wisdom
The conventional wisdom has it that many of us will have lower taxable income during retirement. A look at the mathematics indicates the conventional wisdom may not necessarily be true. Few among us will be willing to voluntarily reduce our standard of living just because we’re no longer fully employed. Many, (this author included) desire to eat more, ski more, travel more, entertain more and generally enjoy the employment-free years in a joyous celebration of moderate to extreme excess. Celebrations aren’t cheap!
Deficits, Debts and You
Without sparking a policy debate, it is fairly obvious that the government will need more and more cash (revenue) to keep running. Funding fairly rigid and largely unavoidable Social Security payments, Medicare reimbursements; military operations and all the other programs and services that we have grown so fond of (deficits), interest payments to debt holders (debt), is not an inexpensive venture—here’s where you come into the equation: REVENUE.
You are the answer to the revenue dilemma—Congress will simply expand the amount of your income that is taxable as well as increasing the rate at which income is taxed: very simple indeed!
To Convert or Not to Convert, That is the Question
There is no shortage of considerations involved in conversion from a regular IRA to a Roth IRA. Among them: Federal income tax rates current and future; New Jersey income tax current and future; Federal and New Jersey estate tax; investment returns; time till and in retirement; taxable pensions, expected Social Security all should be considered carefully and in concert.
There are multiple sources of information on the Internet, at the local watering hole, in print and on television. Unfortunately these information sources are completely unable to take into consideration your unique circumstances. You should always consider the advice of a qualified financial and/or tax advisor before making this, or any other important financial decision.
Tom Duffy, a Certified Financial Planner Professional™, has been active in the financial planning and wealth management business since 1993, working with individuals, families and business owners always putting the needs of clients first. Jersey Shore Financial Advisors, LLC is a NJ Registered Investment Advisor providing comprehensive financial planning services to individuals, families, multi-generational family groups and businesses on a fee-for-service basis. Questions or comments are welcome by e-mail or 732-229-7489 at his Red Bank office.
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