Wednesday, April 21, 2010

Roth IRA Conversion Magic!

Last year I suggested clients talk to their CPAs about the costs of transferring some money from their traditional IRAs into a Roth IRA, because the IRS was going to allow transfers done in 2010 to have the tax on the transfer spread over 2 years.

I see all clients 1 to 4 times a year depending on need and the amount of assets I am managing for them. When I meet with clients along with my normal investment report I have a 2 page sheet showing my concerns and thought about the recent past and coming year. The following is an excerpt from one of today's client meetings.

2. Last year we transferred $12,978 from your IRA Rollover to your Roth IRA. This year your CPA said to move $25,956 from your IRA Rollover to your Roth IRA. We transferred shares (to keep trading costs down) and got a little more than we wanted, $27,883.83. You will be paying taxes on this over a 2 year period of time and this may cause you to pay taxes on and extra $963.92, each year. The extra tax should be approximately $96.39, each year.

3. We transferred this money into your Roth IRA because it will grow tax free, but come out of the Roth IRA tax free; rather than 100% taxable which would be normal when money comes out of an IRA Rollover. The amount to roll over was figures in such a way that you probably will not have to pay any tax on the money transferred. If calculated correctly you transferred money from an account that is 100% taxable when money is removed, into an account that is 100% tax free when money is removed and did not have to pay any tax on the money we transferred. Now that is real MAGIC if it works out correctly.

Pretty cool!