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The June issue of Ed Slott's IRA Advisor Newsletter lays out a call to action. 2010 will always be known as the Year of The Roth IRA Conversion.

Financial advisors will be measured by what planning they did during 2010 with low tax rates.

The impact on your clients' retirement accounts and your professional legacy comes down to what you know and when you act (BEFORE YEAR-END).

For a more detailed analysis of this subject, check out the June issue of the newsletter.




Inside Ed Slott's IRA Advisor Newsletter

Make Roth IRA Conversions Less Taxing

Finding Conversion Cash Now... Before Tax Rates Increase

  • The Roth Conversion Conversation
  • Don't Pay the Tax from the Converted Funds
  • 10% Penalty Trap
  • Finding Non-IRA Sources of Roth Conversion Cash
    1. Cash
    2. Capital Gain Assets
    3. Tax-Deferred Assets
    4. Tax-Free Assets
  • Using Cash
  • Loans as a Source of Conversion Cash
  • Using Capital Assets - Gain from Losses
  • Watch Out for Wash Sales
  • Use Capital Losses from Prior Years
  • NUA Nuance
  • Charitable Options
  • Backing Into the Roth Conversion
  • Advisor Action Plan

If you are not already an Ed Slott's IRA Advisor Newsletter subscriber, you can preview past issues before subscribing.


Income taxes paid by Americans last year were at their lowest level since Harry Truman was president, according to the Bureau of Economic Analysis. Federal, state and local taxes, including income and other taxes, but excluding real estate and sales taxes, consumed 9.2% of all personal income in 2009, the lowest rate since 1950. This rate is far below the historic level average of 12% for the last half century.

Individual tax rates vary widely based on how much a taxpayer earns, where the person lives and other factors. On average, though, the combined tax rate paid by all Americans, rich, poor or somewhere in-between, has fallen 26% since the recession began in 2007. Taxes paid have fallen at a much faster clip than income during this recession. While personal income fell 2% last year, the amount of taxes paid dropped by 23% (social security taxes are excluded from the tax calculation.)

In an interesting twist, a Gallup Poll last month found that 48% of those surveyed thought taxes were "too high" while 45% thought they were "about right." In reality, they were at a 50- year low.

When John F. Kennedy took office the top income tax rate was 91%. He lowered it to 71%. In 1981, President Ronald Reagan reduced the top rate to 28%. Today, it is 35%. Unfortunately, the 35% rate is due to expire on December 31, 2010 and will go back to 39.6% on January 1, 2011.

The expected rise in federal income tax rates creates an interesting dilemma for retirement account holders converting to Roth IRAs in 2010. Should they treat the taxable portion of their conversion as 2010 income, knowing the rate at which they will pay income tax? Or, should they roll the dice and split the amount evenly in 2011 and 2012, not knowing exactly where rates will be or how much tax they will pay on their conversion? These individuals must ponder where they think their income levels will be in 2011 and 2012, versus 2010, and make an educated guess about where income tax rates are headed and what affect all of that will have on them.




"Ruling to Remember" is not a PLR, but it is important information you need to know in order to avoid fines, penalties or ruling requests in your future.

Individuals are not complying with IRA excess contribution and minimum distribution requirements at an alarming rate, leading to significant revenue loss to the federal government, according to information put together by a Treasury Inspector General for Tax Administration (TIGTA) audit.

The TIGTA stated: "IRS procedures are inadequate to identify individuals who make IRA contributions in excess of what the law allows or individuals who are not taking required minimum distributions."

The audit defines an excess contribution as any amount contributed to the two main types of IRAs (traditional IRA and Roth IRA) for the year that exceeds the contribution limit, or any amount contributed to a traditional IRA by an individual who has reached age 70 1/2.

If the excess contribution is not withdrawn by the due date of the tax return (including extensions), there is a 6% excise tax on the amount of the excess contribution.

A review of the 2006 and 2007 tax years found that a staggering 295,141 individuals made $1.5 billion in excess contributions to their IRAs in those years, resulting in an estimated loss of $94 million in excise tax and $17 million in income tax. 255,498 individuals did not take required minimum distributions, totaling $348 million during that time, and resulting in an estimated tax revenue loss of $174 million.

With $3.6 trillion held in IRAs during 2008, the audit concluded: "The IRS needs to develop a service-wide strategy to address growing noncompliance."

Q: If a person converts to a Roth at the age of 57, does that person have to wait 5 years to withdraw the conversion amount and the earnings without paying a penalty?

A: You can always take a distribution of basis from a Roth IRA. Basis is annual contributions and converted amounts. Those distributions will NOT be taxed when they are withdrawn as they were subject to tax when they went into the Roth IRA (or they were already after-tax amounts).

There are ordering rules for Roth distributions. The ordering rules are as follows: contributions come out first; converted amounts come out next; funds that were taxable at the time of conversion come out before funds that were not taxable at the time of conversion; earnings come out last. A distribution of any converted amounts or earnings before age 59 1/2 will be subject to the early distribution penalty. In addition, the earnings distributed will also be taxable.

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