Traditional IRA or Roth IRA? Reasons to Take the Roth IRA Plunge - 2
By Saghir Aslam
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)
After Changing to a Roth, would you still need your Accountant?
No. There would be nothing for the accountant to figure out.
Once you begin withdrawing money out of a traditional IRA, the headaches begin.
First, if you made nondeductible contributions to a traditional IRA, you may have a tough time figuring out what portion of each withdrawal is taxable. Second, after you turn 70 ½, you have to contend with minimum distribution requirements, which force you to withdraw at least some money each year from your IRA.
But if you convert your IRA to a Roth IRA, both these hassles disappear. Suppose you and your spouse earn more than $160,000 a year, which means you don’t qualify for the Roth. Instead, your only choice is to make nondeductible IRA contributions.
Deterred by the potential accounting headaches associated with a nondeductible IRA? Don’t be. You can kill off the problem when you retire, by converting your IRA to a Roth. To be eligible for the conversion, your income has to be $100,000 or less.
Similarly, if you convert your IRA to a Roth, you are no longer bound by the minimum distribution requirements. That means you can leave money in your retirement account for longer and thus benefit even more from the Roth’s tax-free growth. I am sure you will enjoy all of the benefits of the Roth IRA.
Leave them Smiling
If you leave behind a large inheritance, your heirs will remember you fondly. If you leave that large inheritance in a traditional IRA, those fond memories may lose some of their luster.
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr Aslam does not have anything for sale.)
Here’s the problem. If anybody other than your spouse inherits a regular IRA they will potentially owe both estate taxes on the inheritance and income taxes on the IRA withdrawals. When money is withdrawn from the IRA, your heirs can take a tax deduction for the federal estate taxes paid.
But many people don’t take the deduction, either out of ignorance or because they don’t itemize. If they do take the deduction, it is horribly complicated.
You can eliminate all these hassles for your heirs, by converting your IRA to a Roth. They may still owe estate taxes but the income-tax bill will be gone.
Moreover, if you convert to a Roth, your heirs will be able to take withdrawals over their life expectancy, provided they follow the tax rules. That ensures that they will get years and years of tax-free growth.
By contrast, if somebody other than your spouse inherits your regular IRA, the rules are much more restrictive, and your heirs may be compelled to empty the account almost immediately.
I really like people to do Roth conversions for estate-planning purposes. But because of the pitfalls, if we are talking about a person with a $100,000 IRA, it’s worth paying someone to crunch the numbers. This isn’t slam-dunk. Check with you accountant if a Roth IRA is right for you. I believe people should convert to Roth IRAs. May Allah (SWT) help us all to make the right decision.