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Possible Relaxation of Roth Conversion Rules

The House of Representatives concluded its annual tinkering with the tax code.

By: Jack Kiley

On an annual basis, Congress attempts to stimulate the economy, steer public policy and balance its books by changing the tax code.

In recent years, there has been an agreement that any changes to the tax code need to remain ‘revenue neutral.’ In other words, Congress must give to us in one place (tax cuts) and take away from us (tax increases) somewhere else.

Last year, they’ve included a provision (in the tax ‘increase’ side of the ledger) that many of our clients will find interesting. Under current law, traditional IRAs can only be converted to Roth IRAs if the account holder’s ‘modified adjusted gross income’
does not exceed $100,000 for that tax year.

(Try computing modified adjusted gross income!). Assuming that this test is met, the conversion is made and the account holder pays tax on the conversion amount now; and generally speaking, all future earnings in the account will be distributed tax free.

Under the provisions in the proposed new law, the modified adjusted gross income limitation would be repealed. Furthermore, (as an incentive to convert), the proposed law will allow you spread the conversion amount over two tax years. Unfortunately, we will have to wait. This provision will apply for tax years beginning after 2009 (this must be when Congress, feels they need our money!).

If this passes the full Congress, this may provide a future planning opportunity. Your financial advisors should be able to, assist you in analyzing this.

Jack Kiley, CPA - Partner, Entrust MidAtlantic, LLC.. Serving the states of Maryland, Virginia, DC, and the Western Counties of West Virginia. jack.kiley@entrustmidatlantic.com

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