Pay more in taxes now? It makes sense
by Jenika Cook
One-year change in rules for Roth IRA conversions means you can take steps now to build more wealth over the long run. Even if the tax bill says otherwise.
As a tax professional, I never imagined I would recommend a strategy that increases a client’s taxable income. This year, however, I will be venturing into uncharted territory. In 2010, the $100,000 income limitation for converting certain retirement accounts into a Roth IRA has been lifted and many taxpayers will benefit from this change.
Before I get too deep into specifics, here’s some background. A Roth IRA is a retirement account funded with after-tax contributions, so it does not qualify for a tax deduction, but the earnings grow tax-free. Conversely, other retirement accounts allow for a tax-deductible “pre-tax” contribution; earnings grow tax deferred, and withdrawals are taxed as ordinary income.
A Roth conversion is electing to rollover a pretax retirement account into a Roth IRA account. You include the fair-market value of the account on your tax return and pay ordinary income taxes on the converted amount.
Initially, it would seem the only reason you would want to convert to a Roth IRA is if you will have a higher tax rate upon retirement. However, here are five other reasons why you may want to consider a conversion:
1. If you will have a taxable estate and want to leave the retirement account to your heirs, the cash you use to pay taxes on the conversion would be excluded from your estate. Additionally, the beneficiaries of the Roth IRA never have to pay taxes when the funds are withdrawn. The value of the Roth IRA is still included in your estate but the income tax cost of the account is now excluded. In my opinion, this is the most significant reason for high net-worth individuals to consider completing a conversion.
2. Roth IRAs do not have the required minimum distributions that other retirement accounts have at age 70½. This allows you to keep funds in a retirement account longer and let them grow tax free at the same time.
3. Because of market declines over the past year, your retirement account may have experienced a significant decrease in value. By completing the conversion now, you may have a lower taxable amount than you would have had previously.
4. If you have expiring tax attributes such as net operating losses, charitable contribution carryover, investment tax credits, etc., increasing your taxable income may allow you to use deductions or credits that would otherwise expire.
5. Taxpayers who are currently contributing to a non-deductible traditional IRA should evaluate a conversion because the taxable amount is only the earnings on the account, not the entire fair market value. You may also consider contributing to a non-deductible traditional IRA and then complete a rollover conversion. This is a work around to the Roth IRA annual contribution income limitations.
Most advisors recommend that you only convert if you have the ability to pay for the taxes outside of the retirement account. You have the choice to take the tax burden all in 2010 or you can spread it over 2011 and 2012.
You do have the ability to change your mind after you have made a conversion up until the due date of your tax return. If your cash position changes or the fair market value of the account declines after you have made the conversion, you can complete a re-conversion.
Consult with your tax adviser to test the effects of a conversion. Many factors that could alter your tax bill include alternative minimum taxes, state taxes, phase outs, tax credit limitations, estimated tax payments and whether your retirement account is eligible for conversion. You should also calculate any estate tax savings.
Taxpayers now have another tool to incorporate into their overall wealth management plan. By paying more taxes today, it could increase your wealth in the long run. 
Jenika Cook is a certified public accountant and Director of Tax and Accounting for Mariner Holdings in Leawood.
P | 913.647.9758
E | Jenika.cook@mariner-holdings.com