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Roll over Roth IRA!

Roth IRAs are Aunty’s favorite way to save and invest.  We first put tax write-off-able funds into a SEP IRA (or regular IRA) and then converted them into a Roth IRA.

Is it a good idea?

Well, the February 12, 2012 issue of Forbes magazine says it is a great idea and calls it a backdoor Roth.

All IRAs are good because gains (capital long or short term, dividends, interest) are allowed to grow without taxation from Federal or State.  Tax deferred is the description used for regular IRAs.

Roth IRAs are the best because of the tax break on the back end when you draw out the money during retirement years (so you pay zero taxes), withdrawals are not counted as extra income against Social Security benefits, and you don’t have to take withdrawals if you don’t want to – which will allow you to leave the entire account to your heirs and their subsequent tax-free withdrawals after you “go”.

Why doesn’t everyone have a Roth IRA?

To directly contribute to a Roth IRA has limitations.  Contribution limits are only $5,000 per year ($6,000 if you are 50 or older) per person.  When your income exceeds annual limits for your tax filing status, you become ineligible to contribute to a Roth IRA.  In the case of most Roth IRAs, the funding of these accounts is made with after tax dollars – so you don’t get a tax break from the deduction from income the way you do with a regular IRA or 401(k).

Regular IRAs (SEP, SIMPLE) do not have as restricted a contribution limit – so that, and the fact that contributions are tax deductible make this a popular choice for many individuals.  However, when you are older and ready to take distributions (forced to take at 70 1/2), these distributions will be taxed at your regular income tax rate at the time.  : (

So what can you do to boost your Roth using your regular IRA?

Take advantage of the generosity of the IRS’s new rule which began in 2010.  Regardless of your AGI (adjusted gross income), you can convert your regular IRA funds into a Roth IRA account.  The caveat here is that you must pay income tax on the entire conversion amount – it is considered to be income when you convert because prior to, in the regular IRA, you were able to deduct the contribution from your income for tax purposes.

It is also VERY important that you do not “touch” the funds as they transfer – bank to bank or institution within the established accounts is the way to do it – so that it is not considered a distribution to you in any way, shape, or form.

Even better?

The February 2012 Forbes article entitled “Roths for The Rich” walked readers through the process of “dancing a little two-step through the Roth’s back door”.  It is called a “roll-in” and consists of rolling your regular IRA funds into your workplace 401(k) to limit your conversion tax hit.

Once the transfer is complete, make new aftertax contributions for 2011 and 2012, and then convert at little or no tax cost.

For each tax year that you make a nondeductible (aftertax) contribution to an IRA, you must file a Form 8606 with your 1040.  Any contribution you make for 2011 gets reported on form 8606 for 2011 – even if you make the contribution in 2012 (before April 17).

Any 401(k) roll-in or Roth conversion you do in 2012 is reported on this form also, but filed on your 1040 for 2012.  During that tax filing in 2012, you will need to include as “IRA distributions” the amount you rolled into your 401(k) as well as the amount you converted to a Roth.  If this is done correctly, you can write “0” as the taxable share of those distributions.

What does that mean?

To tell you the truth, Aunty doesn’t really get it (so ask your CPA or retirement specialist).  All I know is that IRAs are good, Roth IRAs are best.

What does Aunty and Uncle do?

We convert our SEP IRA funds into Roth IRA accounts and pay the taxes due for that year.  To offset that tax hit, we contribute to our SEP IRA an amount equal to the converted amount.  The result is a tax hit in and a tax hit out, which means we pay our regular tax for the year without benefit of deduction or additional taxes for conversion.  In this way, the $5,000 ($6,000 for us because we are older) limits for Roth contributions are nullified because our SEP IRA contributions can be whatever max allowed based on income, and the conversion has no dollar limit rules.

What about young people?

Open a Roth IRA account today.  Most banks, brokerages, trust companies, credit unions and other financial institutions have Roth IRAs.  A good one for people who like the control of trading stocks and options is a self directed Ameritrade account.

Even if you start with the minimum of $2000 in your new Roth Ameritrade account, it is a good start.  Linking your bank account will allow you to transfer money into the Roth IRA, and Ameritrade is very good at providing the status of your contribution by current year and how much more you can contribute.

If you don’t want a self directed IRA for stocks and options trading, then any bank or financial institution will do – just be sure you check their fees and such.

If you know you want to invest your IRA funds for real estate, gold and/or silver coins, or other investment choices, then IRA Services Trust is a good one – low annual fees, little or zero fees for transaction.  I will be updating with a “how to” set up and use your IRA for real estate investing as soon as we complete one this year.

In short, any time you invest in a retirement account, you will be grateful in your golden years when your eyes can feast on the grown tax deferred assets in your retirement portfolio statements.

Here’s to your continuous good health and wealth!






About The Author

Aunty is a new senior citizen and loving this phase of her life. Less responsibilities, less fear of being weird, able to do more of the things that I want to do! Older, yes, slower, yes, but life is even more wonderful in my golden years and I look forward to even goldener ones.

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