I recently read a great article at InvestmentU by Jason Jenkins.
At the end of this year, the “Bush-era tax cuts” – as they have been labeled for the last decade – are set to expire. Now Republicans want them to stay in place across the board.
The President and Democrats are okay with that for lower and middle class Americans, but are adamant that they’re repealed for those who earn over $250,000 a year.
I’m not here to talk politics, but rather look at reality. Over the last few years, any time that both sides of the aisle in Congress start talking about their platform or base, nothing good happens. And it’s likely going to be another fiasco in this last quarter of 2012.
What I believe is that if there’s uncertainty out there, err on the side of caution. Don’t get stuck with regrets. And if you don’t act in the next three months, you may be kicking yourself down the road.
Using Roth IRAs As An Estate-Planning Tool
Remember back in 2010, Congress allowed for the expiration of the $100,000 adjustable gross income (AGI) limit on Roth IRA conversions. That meant no more income limits, so high earners could now take advantage of the benefits of a Roth.
And why do we love the Roth IRA so much over a traditional IRA? Here are few reasons why converting seems so attractive:
- Roth contributions are made with after-tax money, but the earnings and all withdrawals in retirement are tax-free.
- Roth IRAs give you a big tax break on the back end that a traditional does not.
- Roth withdrawals aren’t included in determining how much of a retiree’s Social Security check is taxed under current law. Nor is how much in extra income-based Medicare premiums he/she has to pay.
But the end of 2012 becomes so important due to possible tax changes. If you convert your traditional IRA to a Roth, it could mean a big tax hit, because all that pre-tax money and tax-deferred earnings become taxable income the year you convert.
If you do it now in 2012, you’re almost certain of the extent of the tax damage you’ll be exposed to. However, after this year… it could be a lot worse.
But here’s something to keep in mind. Converting to a Roth may not be beneficial to you later in life. But a Roth IRA could substantially help your heirs after you’re gone.
As an estate-planning tool, a Roth account can reduce estate taxes and get rid of the income tax heirs must take on withdrawals from a traditional IRA.
Let’s look at how this works…
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To read more, please visit the InvestmentU article link.
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