Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.  

Investment advisors are hungrier than ever for positive news to share with their clients – it has been scarce as of late. Thankfully, there are bright spots on the horizon for retirement planning. Imminent changes to the Roth IRA rules will open the door to over $1 trillion dollars in potentially convertible retirement plan assets on January 1, 2010 – good news for clients and for advisors looking for new ways to grow their businesses. 

Both houses of Congress have passed legislation, applicable to individuals who are age 70-1/2 or older, that provides temporary relief in 2009 from the federal laws governing required minimum distributions (RMDs) from IRAs and various employer-sponsored retirement plans.  Rumor also has it that the Treasury Department may provide some type of RMD relief for 2008 as well.

Just out of reach

Since their creation in 1998, Roth IRAs have enjoyed ever-increasing popularity as a tax-savvy alternative to conventional tax-deferred retirement savings, such as traditional IRAs and traditional 401(k) salary deferral contributions. This popularity was underscored by the significant increase in the amount of annual Roth IRA contributions following the liberalization of the funding eligibility requirements in 2002.

But, even as the eligibility requirements for annual Roth IRA funding were liberalized, a provision in the federal tax law that allows certain qualifying individuals to “convert” traditional tax-deferred savings to Roth IRA savings has been kept tantalizingly out of reach for many taxpayers. To convert, qualifying individuals must include the taxable portion of the conversion amount among their taxable income for that year.

So, what are the advantages of converting traditional, tax-deferred savings to Roth IRA savings?  There are three important benefits:

• The potential for tax-free growth – especially important for those who think income tax rates are likely to go up
• Tax diversification – crucial for retirement income planning
• The ability to avoid required minimum distribution at age 70-1/2  – a key feature for individuals interested in leveraging their retirement savings as part of their financial legacy

Display article as PDF for printing.

Would you like to send this article to a friend?