The Legal Pad of Richard Magnone this month: Last Minute Tax Savings by Taking Advantage of Roth IRA Conversion

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WANT TO SAVE $560 OR MORE THIS YEAR? DO YOU HAVE A ROTH YET? By Richard Magnone © 1998 By taking advantage of the Roth IRA provisions of the Taxpayer Relief Act of 1997, you can save taxes in 1997 and enjoy tax free withdrawls from your IRA in the future! You can still make a $2000 contribution to an ordinary IRA at any time up to the earlier of filing your taxes or April 15, 1998 and take the deduction on your 1997 taxes. This means that a taxpayer in the 28% tax bracket could save $560 on 1997 taxes. Next, you can convert your IRA to a new "Roth IRA." This is a new type of IRA established by Congress which allows for non-deductible contributions from earnings but has the benefit of tax free withdrawls. The tax law allows an existing IRA to be converted to a Roth IRA. This process requires that the taxpayer pay tax on all converted amounts which have not yet been subject to income tax. However, to ease the tax burden of conversion, the IRS will allow taxpayers to spread out the payment of those taxes over four years! Thus, for someone converting a $2000 IRA contribution made on a 1997 tax return, that taxpayer will have to pay tax on an additional $500 for four years. Once converted, Roth IRA funds are no longer subject to income taxation! Distributions from Roth IRAs are tax free. No tax will ever be paid - NEVER. Here are the results of a single taxpayer contributing 2000 per year for 50 years: *(assuming 12% rate of return on assets) After Roth IRA Value Traditional IRA Value Roth Benefit 10 Years 33,035 28,302 $ 4733 20 Years 130,904 116,206 $14,698 45 Years 2,440,428 2,190,553 $249,875 50 Years 4,311,115 3,870,749 $440,366 A married couple making maximum contribution can save an additional $880,732 by taking advantage of the Roth IRA. Other benefits of the Roth: No required beginning date May be withdrawn early if owner becomes disabled Contributions may still be made after reaching age 70½ First time home buyers may withdraw up to $10,000 for a home It still may not be too late to get a jump on lowering your taxes savings and saving for your retirement! Click here for more on income taxes! DISCLAIMER This website is intended to supply general information to the public. Although the information is generally accurate, it cannot be guaranteed. The nature of Legislation is that laws change quickly, and visitors should always insure that legal information is accurate before relying on it. The above information applies the law of the State of Illinois. The law in your jurisdiction may be different. This information is necessarily brief and may or may not apply to your situation. In all cases, PLEASE, consult a lawyer before acting. This website is not intended to be advertising, solicitation, or legal advice. Thus, the reader should not consider this information to be an invitation for an attorney-client relationship, should not rely on information provided herein, and should always seek the advice of competent counsel in the reader's state. Return to Legal Pad Contents Return to Main Page