The federal tax on transfers of wealth from estates has been with us since the passage of the Revenue Act of 1916, although there were similar temporary levies around the time of the Spanish-American War. This tax came to an end, albeit temporarily, on December 31, 2009.
Every year, many investors find themselves “buying a distribution” and incurring liabilities that could have been avoided or at least deferred.
Tax law requires that realized gains in a portfolio be distributed at least annually, typically in December. If you’re about to buy, it pays to check the next distribution “record date” prior to making a purchase.
The issues aren’t quite the same as those one faces when considering the deepest aspects of personal faith and religious doctrine, but a “Roth conversion” can pose some difficult issues for investors nonetheless. And we’re going to hear much more about this going forward because of a scheduled change in the law: Unless something unexpected happens in D.C., come 2010 there will no longer be income limits on Roth IRA conversions.
There will be a lot written on the issue of whether one should convert or not, as well as endless articles describing all kinds of “strategies” to potentially leverage the change (some legitimate and others more questionable). For me, three things are important in considering this kind of “conversion”:
We’re coming to the close of 2009. It’s been an eventful year, a year of change, and over the next few weeks you’ll be seeing a lot of articles putting it all in perspective.
It’s also the close of the tax year, and year-end planning should be commanding some of your attention. One of the few tools not blunted by this soured economy is tax-loss harvesting—a strategy that can shelter income and reduce portfolio risk. And one might say this has been a banner year for tax losses.
There’s a savings vehicle in which all earnings, appreciation, and interest can be free of income tax forever. If the rules are met, there’s no RMD to be taken, no income tax due on withdrawals, and, while the account assets are included in your estate, withdrawals by your beneficiaries can also be tax-free. It hasn’t been available to everyone because of income limits, but it soon will be.
I’m speaking about the Roth IRA, of course. Until now, higher-income taxpayers ($100,000 modified adjusted gross income or higher) couldn’t convert their savings from a traditional IRA to a Roth. But that’s about to change.
