It's not a stretch to say many farmers and farm families can benefit from investing in IRAs and getting their estate plans in order. Many Individual Retirement Accounts (IRAs) have been hard hit by the fall in asset values. However, even bad markets can create estate planning opportunities.
Conversion to a Roth IRA
If you’ve ever been attracted to the idea of converting your traditional IRA to a Roth IRA, this may be the time to do it. Converting to a Roth IRA means tax-free portfolio growth and no minimum distribution requirements at age 70 and a half. But to convert, you must pay the ordinary income tax rate of 35 percent on the IRA balance, because deposits in a traditional IRA are made before they are taxed. When the values of IRA mutual funds and other assets are down, the conversion cost goes down as well because there is less to move to the Roth. That is why now a good time to convert. Then, as the markets recover and assets appreciate in value, all that growth can be tax free. For maximum tax benefit, it’s best to pay the tax on the conversion from assets outside the IRA.
Unfortunately, not everyone is permitted to make a Roth IRA conversion. For the 2009 tax year, you can’t convert if your adjusted gross income is more than $100,000 (single or married). Under current law the cap will be eliminated in 2010. It is possible that Congress will revoke that change before it takes effect, although under the revenue-scoring systems in place, such a revocation will lose revenue.
What if you did a Roth conversion in 2008, when asset values were high, and now you regret that decision? You are permitted under the tax law to change your mind, up until the due date (with extensions) for filing your 2008 tax return (October 15, 2009). The process is called a “recharacterization.”
Here’s an example: Taxpayer converted a $100,000 traditional IRA to a Roth IRA, but the account is now worth only $70,000. How can he return the $100,000 to the traditional IRA? He doesn’t have to. When the money is returned to traditional IRA status, it must be accompanied by the “net earnings attributed to it” while it was in Roth IRA status. Net earnings can include losses. If the entire $70,000 is recharacterized as a traditional IRA, Taxpayer has met the requirement. The key benefit for Taxpayer is that ordinary income tax on the $100,000 conversion need not be paid.
Should you decide to recharacterize, you must wait for 30 days or the next tax year to do another Roth conversion.
Required Minimum Distribution Relief
Typically, if you have a traditional IRA, you must take a minimum annual amount from your IRA beginning the year you reach age 70 and a half, called the Required Minimum Distribution, or RMD. The amount is based upon your account balance at the end of the previous year and your life expectancy. If you don’t make a withdrawal or don’t withdraw the correct amount, there’s a big penalty – 50 percent of the difference between what you should have withdrawn and what you actually did withdraw, in addition to the usual ordinary income tax that you have to pay.
Congress removed the 50 percent penalty from the books for this year, eliminating the need to take money from your IRA if you don’t need it. As it stands now, mandatory withdrawals will be in effect once again in 2010.
Jami Peebles is a Senior Vice President with Central Trust & Investment Company in Springfield, Mo.
