Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA)
Posted by Entrust Orange County on Tue, Dec 08, 2009
TIPRA an acronym for a relatively new tax law passed just a few years ago. In essence, one of the major opportunities provided by this tax act related to investing with your traditional and Roth IRA’s. Before the new act, an individual could only convert their Traditional IRA to a Roth IRA if their adjusted gross income for that year was below $100,000. But with the new tax act, in 2010, these new rules will allow taxpayers to convert or rollover funds from a Traditional IRA to a Roth IRA regardless of their income level.
So you may have the question as to why would you want to convert your traditional IRA into a Roth IRA? Well, the answer lies in the different tax treatment of Traditional IRA’s vs. Roth IRA’s. For those of you who are not familiar with the differences between a Traditional and a Roth IRA, here is a quick overview. With the traditional IRA, you make pre-tax contributions to the retirement account but pay taxes on the money once you withdraw upon retirement. Conversely, with a Roth IRA, you make after-tax contributions to the retirement account, but the withdrawals upon retirement are tax free. So in summary, the traditional IRA allows for tax deferred growth while a Roth IRA generally provides for tax-free growth.
The benefit of the strategy of converting your money from a traditional IRA into a Roth IRA lies in the number of years to retirement and the number of years of compounding growth left. So if you can pay taxes now on a smaller amount and then let that money grow tax-free, then you are able to accelerate your wealth building potential by eliminating the tax drag on your investments. Here is the down-side to this new rule, the amount that you convert to a Roth IRA in 2010 will be taxed as ordinary income when you make the conversion.
So let’s share with you two tax saving techniques that can reduce this potential negative impact. For the first strategy, look to minimize your income in 2010 so that any income resulting from the Roth Conversion could be taxed at a lower rate. Those of you with substantial real estate investment, plan ahead to generate enough tax losses from your real estate in 2010 to offset this other income from the conversion.
And the second strategy is for those of you who can’t currently contribute to a Roth because your income is too high and/or for those of you who can’t make deductible contributions to a Traditional IRA because you are covered by another retirement plan. If this is you, then you may want to consider making non-deductible contributions now to a Traditional IRA and then convert such amounts to a Roth in 2010. Even if you can’t get a deduction for these contributions now, this sets aside some funds that you can convert into a Roth IRA in 2010, which in essence starts the clock ticking for your tax-free growth. Also, the roll-over of nondeductible traditional IRA money is not taxable in the year of a Roth conversion. This roll-over opportunity is a huge advantage to many high-income taxpayers who traditionally have not been able to maximize their wealth preservation through Roth IRAs. Please speak to your tax advisor if you feel this could benefit you and start planning now to take full advantage of the 2010 TIPRA rules.
By: Keystone CPA, Inc.