After Changing to a Roth, Would You Still Need Your Accountant?
By Saghir Aslam
Rawalpindi, Pakistan
(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)
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 contribution to a traditional IRA, you may have a tough time figuring out what portion of each withdrawal is taxable. Second, after you turn 70½ you have to contend with minimum distribution requirement, which forces 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. 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 the nondeductible IRA contribution.
Deterred by the potential accounting headaches associated with the 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. Similarity, 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 far longer and thus benefit even more from the Roth tax-free growth. I am sure you will enjoy all the benefits of the Roth IRA.
LEAVE THEM SMILING
If you leave behind 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. 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 withdraws. When money is withdrawn from the IRA, your heirs can take a tax deduction for the federal estate taxes paid.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; your heirs will be able to take withdraws over their life expectancy, provided them 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 IRAs, the ruls 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 purpose. But because of the pitfalls, if we are talking about a person with a $100,000 IRAs, it’s worth paying someone to crunch the numbers. This isn’t slam-dunk, check with you account if a Roth IRA is right for you. I believe people should convert to Roth IRAs. May Allah (SWT) help us to make the right decision. (Ameen)
(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.)
