Tax Tip of the Week
For the week of January 3, 2005

A new Roth IRA rule benefits seniors

A change in the Roth IRA rules takes effect on January 1, 2005. This new rule, which applies specifically to people over the age of 70½, will make it easier for seniors to convert their traditional IRAs to a Roth IRA.

Roth IRAs were created by the 1997 Tax Act. Unlike traditional IRAs, Roth IRAs are tax-free, which means that you don't pay taxes on money withdrawn from your Roth as long as certain conditions are met.

Along with the introduction of these tax-free retirement savings accounts came the opportunity to convert your traditional IRAs to a Roth. Yes, you pay taxes on the money converted. But that money grows tax-free from that day forward.

Not everyone is eligible to convert their IRAs to a Roth IRA, however. To qualify, your adjusted gross income (AGI) can't exceed $100,000. That threshold applies to single individuals and to married couples alike.

The new rule. Here's where the new rule helps seniors. Starting on January 1, your annual required minimum distribution (RMD) from your IRAs is excluded when determining if your income exceeds the $100,000 threshold. Let's say you'll turn 75 next year and your IRA accounts are worth $300,000. Based on your life expectancy as reflected in the Uniform Lifetime Table, your RMD for 2005 would be $13,100. While this distribution is taxable to you, it no longer counts when determining eligibility for a Roth conversion.

To find out more about this tax law change, and whether converting your IRAs to a Roth might make sense for you, please give us a call.
  

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