Congress has changed the rules as to how you can convert a traditional IRA into a ROTH IRA for the 2010 tax year. If you own a traditional IRA, sometime this year you will probably be contacted about converting to a ROTH IRA. Under tax law for this year, you have the option of paying the tax due for the IRA in 2011 and 2012.
Before you convert your IRA to a ROTH IRA consider these questions:
• Will I need this money to live on after I quit working?
• Is my intent to leave this money to my heirs?
If you answered the first questions no and the second one yes, there is another option to consider. With this method, you can spread the income taxes due over several years and provide your heirs with a tax free inheritance.
This option uses a life insurance policy and a single premium immediate annuity. The first step is to determine how much a single premium immediate annuity, also known as a SPIA, would pay out over 10 or 15 years using the amount in your IRA. Then based on age and health, an insurance agent would determine how much life insurance the annuity payout, net of taxes, would purchase.
Then an analysis would need to be done of the results. A projection would need to be prepared of the future value of the ROTH IRA. In the same manner, the death benefit of the life insurance policy and the value of the annuity would be added together. The value of each option would be compared at various points in time to determine which option would have greatest value. After comparing the various values, based on your goals, you could determine which option would be best for you.
ROTH IRA Conversion Benefits:
1. Income taxes paid over 2 years;
2. Tax free distributions after having ROTH IRA for 5 years;
3. No required minimum distribution at age 70 1/2.
Life Insurance/Annuity Benefits:
1. Income Tax paid over several years;
2. Life insurance death benefit tax free;
3. Life insurance builds cash value that can be borrowed against;
4. Even if annuity owner dies, beneficiary will receive balance of annuity payments.
For further information on this concept, talk to your tax preparer, financial planner or insurance agent.
Marvin L. Miller is a CPA in Springfield, Mo. Email your farm finance questions to [email protected] or call 1-866-532-1960.
