Tags: Roth | IRA | retirement | IRS

Tax Break for IRA Conversion Lured 10 Percent of Millionaires, IRS Says

Friday, 03 Jan 2014 04:03 PM

Congress dangled an incentive for high-income Americans to convert their tax-deferred individual retirement accounts into post-tax plans. Their response was overwhelming.

Conversions from regular IRAs to Roth retirement accounts increased more than nine times in 2010, rising to $64.8 billion from $6.8 billion in 2009, according to data released today by the Internal Revenue Service.

That marked the first time that Roth conversions were greater than contributions. Conversions were particularly common among IRA holders with annual incomes exceeding $1 million. More than 10 percent of them converted to a Roth account, according to the IRS.

The increase in conversions stemmed from a 2006 law that set 2010 as the year when a $100,000 income limit on Roth conversions would end. There’s no limit on conversions if an investor has multiple IRAs and no cap on the amount that can be shifted.

Taxpayers also could split the taxes owed because of the conversions between their 2011 and 2012 returns, giving them until early 2013 before they had to pay the full balance. Wealth advisers pitched Roth conversions to their clients as a pay-now, save-later strategy.

When Congress passed the law, the Joint Committee on Taxation estimated that it would raise $6.4 billion for the government over 10 years. Because Congress looks only at the revenue effects for the first decade, changes that make retirement tax breaks more generous in the long run can be used to offset tax cuts.

Contributions to a regular IRA are tax-deferred, with up-front deductions and taxes owed when the money is withdrawn from the account.

In contrast, Roth accounts are built with post-tax money. Account holders owe no taxes when they withdraw the money and don’t have to make required withdrawals once they reach age 70 1/2.

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Congress dangled an incentive for high-income Americans to convert their tax-deferred individual retirement accounts into post-tax plans.
Roth,IRA,retirement,IRS
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2014-03-03
Friday, 03 Jan 2014 04:03 PM
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