2010 Roth Conversion Legislation

In 2010, the government is offering you the opportunity to put money into a Roth retirement account and pay no income taxes when you take it out at a later date. There is a catch — and there’s a solution that involves a gift to Associate Alumnae of Douglass College.

The two types of accounts are:

  • Traditional IRA: You receive an income tax deduction for your initial contribution and your money grows tax-free inside your traditional IRA account. However, you pay income taxes at your normal rate when you withdraw the money during retirement.
  • Roth IRA: You receive no income tax deduction for your initial contributions. Your money grows tax-free inside your Roth IRA account, then when you take your money out of the account, you pay no income taxes at all.

During 2010, there is no limit to the amount of money you can transfer from a traditional to a Roth IRA, and it no longer matters how much income you earn. There are comparable provisions for 401(k), 403(b), and similar accounts.

The Catch: You need to pay income taxes for this contribution (or rollover) into the Roth IRA account. You can elect to pay these taxes on April 15, 2011, or count 50% of the extra income in 2011 and 50% in 2012. This is not a do-it-yourself project — seek professional advice.

Why should you care that you have the opportunity to pay extra taxes? Because you can take the principal and any gain out at a later date completely tax-free. This is especially attractive if you believe tax rates on your income will increase during the coming years, or if you believe the investments within your retirement plan will grow. We have a way to avoid much of the tax bite AND support Associate Alumnae of Douglass College.

Here are two options:

  1. Make a charitable contribution in 2010 that will create a deduction that offsets the increased income tax.
  2. Put your retirement savings on steroids by offsetting the extra income tax through the use of a charitable remainder trust or charitable gift annuity.

We’re here to discuss these planning options, or others techniques that provide support for the people and charities you love in ways that maximize the gift and/or minimize its impact on your estate.