Tag: capital gain

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Income Tax Planning

New Tax Law – Don’t Let the Tax Tail Wag the Dog – Part 2 of 2

Part 1 of this post focused on the two investment-related tax areas of the new tax law that went into effect on January 1st – (a) the Medicare investment income tax and (b) long-term capital gains and qualified dividends. It made the point that while the amount of potential income tax liability resulting from exposure to one or both of these changes may be significant, neither one in and of itself, or in combination for that matter, should cause you to overhaul an otherwise appropriate retirement income planning investment strategy.

After preparing income tax projections using current vs. prior tax law, your CPA or other income tax professional will be able to determine two things: (a) the total amount of your additional projected income tax liability attributable to various changes in the law, and (b) the amount of your additional projected income tax liability attributable to specific changes in the law, including the Medicare investment income tax and 20% long-term capital gains and qualified dividends tax.

Once you determine the amount of your projected income tax liability attributable to specific changes in the law, the next step is to determine (a) the applicable income threshold type and amount that you have exceeded, and (b) the projected amount of excess income over the applicable threshold amount. In the case of the Medicare investment income tax, the threshold type is modified adjusted gross income (“MAGI”) and the amount is $200,000 if single or $250,000 if married filing joint. If your additional projected income tax liability is attributable to long-term capital gains and/or qualified dividends, the threshold type is taxable income and the amount is $400,000 if single or $450,000 if married filing joint.

Whether you’re affected by the Medicare investment income tax or the 20% (vs. 15%) tax on long-term capital gains and dividends, the next step is to determine the various components of income that comprise your gross income. Once you do this, you need to determine which specific non-investment related components can be reduced, as well as the amount of reductions for each component, in order to reduce the amount of your projected income tax liability attributable to changes in the tax law.

It’s important to keep in mind that some types of income can be reduced indirectly. An example of this is taxable salary which can be reduced significantly by various types of pre-tax deductions as available, including, but not limited to, 401(k) plan and cafeteria plan contributions. Another example is self-employment income which can be reduced by self-employment expenses.

In addition to determining which specific non-investment related components can be reduced, it’s also important to determine if any losses can be created or freed up as another means of reducing gross income. This can include capital losses to offset capital gains, net operating losses, as well as passive activity loss carryovers that can be freed up as a result of the sale of a rental property. The latter strategy can be a double-edged sword since this may also result in a capital gain that may increase exposure to the Medicare investment income tax and/or the 20% capital gains tax.

Since the starting point for determining exposure to both the Medicare investment income tax and 20% capital gains tax calculations is adjusted gross income (“AGI”), the next step is to determine potential deductions for AGI, or “above-the-line” deductions, that you may not be currently taking advantage of. This includes self-employed retirement plan contributions, self-employed health insurance premiums, and health savings account (“HSA”) contributions, to name a few.

If your issue is the 20% capital gains tax, in addition to reducing your AGI, there’s another way that you can potentially reduce your exposure to this tax and retain the 15% favorable capital gains tax. Keeping in mind that the threshold type in the case of the 20% capital gains tax is taxable income which is calculated by subtracting itemized deductions and personal exemptions from AGI, you may be able to increase your itemized deductions in order to reduce your taxable income.

As you can see, there are things you can do to reduce your exposure to the Medicare investment income tax and 20% capital gains tax without changing your investment strategy. If you have an otherwise appropriate retirement income planning investment strategy, don’t let the tax tail wag the dog.

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Income Tax Planning Retirement Income Planning

Sizeable Capital Loss Carryover? Rethink Your Retirement Plan Contributions

Retirement Income Center

Last week’s post answered the question, “What is the right mix of retirement vs. nonretirement investments in a retirement income plan?” with a simple, but correct, answer: “It depends.” It pointed out that each scenario is different, requiring a professional analysis by a qualified retirement income planner of the interaction between a host of many variables unique to that situation.

One of the variables mentioned last week was income tax carryover losses. There are limitations on the amount of losses arising from various types of transactions that may be deducted on the tax return for the year in which the loss incurred. The portion of the loss that isn’t deductible in the year of origin of the loss must instead be carried forward to the following year, and potentially to additional future years, until the requisite type and amount of income becomes available to absorb the loss.

An example of a common income tax carryover loss is a capital loss. After netting capital losses against capital gains, to the extent that there is an excess of capital losses over capital gains, you end up with a net capital loss. Under income tax laws that have been in existence since at least 1980 when I started practicing as an accountant, only net capital losses up to $3,000 ($1,500 if married and filing a separate return) are allowed to be deducted in the current tax year. Any net losses in excess of the specified amounts are required be carried forward to the following year.

If you have a sizeable capital loss carryover, as many people do as a result of 2009 securities sales when the stock market plummeted, nondeductible contributions to a nonretirement investment account may be preferable to making deductible retirement plan contributions, including 401(k) plans, SEP-IRA plans, deductible IRA’s, and other retirement plans. This assumes that you’re not planning on selling an asset, such as a piece of real estate or a business that will generate a sizeable capital gain that can be used to absorb your capital loss carryover.

Why is this? Doesn’t it make sense to contribute to a retirement plan where you know that you’re going to receive a current income tax deduction, often sizeable, that will save you a bunch of income taxes today? Keeping in mind that the tradeoff for a current income tax deduction when it comes to retirement plan contributions is deferred income inclusion and associated taxation when the assets are distributed, perhaps at a higher tax rate, the answer to this question isn’t necessarily “yes.”

This is especially true when large capital loss carryovers are present. If you’re in this situation and you don’t realize any capital gains, you will be taking a $3,000 tax deduction on your tax return for many, many years with the possibility, depending upon your age and the amount of your loss, that your carryover loss won’t be used in its entirety during your lifetime. Given this situation, the goal should be to create opportunities for capital gains that can be used to absorb chunks of your capital loss carryover each year without incurring any income tax liability until such time as there is no further available capital loss.

How do you do this assuming limited financial resources? One option that can make sense in many situations is to divert funds that would otherwise be used for making deductible retirement plan contributions into nonretirement equity investment accounts that have the potential to generate capital gains. To the extent that the equities appreciate in value, they can be sold, with the gains generated by the sales used to offset a portion of your capital loss carryover without incurring any income tax liability. Furthermore, unlike other situations where capital losses aren’t present and your goal may be to hold onto investments for longer than a year in order to obtain the benefit of favorable long-term capital gains tax treatment, this isn’t necessary. Capital loss carry forwards can be offset again any capital gains, whether short- (i.e., one year or less) or long- (i.e., greater than one year) term.

Using this strategy, you won’t receive an income tax deduction for investing in your nonretirement investment account. You will, however, create an opportunity to potentially increase the value of your nonretirement account up to the amount of your capital loss carryover plus $3,000 without incurring any income tax liability that you might not otherwise do. In addition, once your capital loss carryover has been used in its entirety, subsequent sales of assets can create additional losses or capital gains that can be taxed at favorable long-term capital gains rates. All of this can occur without exposing yourself to guaranteed ordinary income taxation at potentially higher tax rates down the road when you take distributions from your retirement plans had you instead invested the same funds in retirement plans.

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Retirement Income Planning

Nonretirement Investments – The Key to a Successful Retirement Income Plan

Retirement Income Center

When was the last time someone asked you, “Hey, did you make your nonretirement investment plan contribution this year?” When we think of a retirement income plan, the first thing that typically comes to mind is retirement investments. This includes 401(k), 403(b), SEP-IRA, traditional IRA, Roth IRA, SIMPLE IRA, defined contribution, defined benefit, and other retirement plans. While the maximum allowable contribution varies by plan, the inherent goal of each of them is to provide a source of retirement funds.

With the exception of the Roth and nondeductible traditional IRA’s, both of which receive nondeductible contributions that grow tax-free provided certain rules are followed, all of the other plans enjoy tax-deferred growth. The reason that the growth isn’t nontaxable, and is instead tax-deferred, is because the source of funds for each of these plans is tax-deductible contributions. Whenever this is the case, although plan income, including interest and dividend income and capital gains aren’t taxed, plan distributions are taxable as ordinary income.

While it’s great that Congress has authorized the use of these various types of retirement plans and there are indisputable tax and other advantages associated with each of them, they generally aren’t sufficient for meeting most people’s retirement needs by themselves. Aside from the defined benefit plan, the contribution ceilings, especially those associated with traditional and Roth IRA plans, are inadequate in most cases for building a sizeable nest egg.

Recognizing this fact of life, it’s important to include nonretirement investments in most retirement income plans. What are nonretirement investments? These are simply the same types of investments that you find in retirement plans, i.e., stocks, bonds, mutual funds, exchange traded funds, annuities, CD’s, etc., however, ownership is different. Instead of these assets being owned by a 401(k) , SEP-IRA, Roth IRA, etc., they are owned by you, you and your spouse if married, or perhaps your living trust.

Nonretirement investments enjoy several advantages over retirement investments that make them attractive for funding retirement income plans. For one thing, although contributions to nonretirement investments aren’t tax-deductible, there also aren’t any annual limitations on the amount of contributions that can be made to them. Secondly, investments can be selected that have the potential to match the tax-deferred growth enjoyed by most retirement plans.

Nonretirement investments also offer tax advantages over their retirement plan counterparts when it comes to sales of assets. While gains from sales of assets in retirement plans are nontaxable, they are ultimately taxed as ordinary income at federal tax rates as high as 35% when distributions are taken from a plan. The same gains from sales of nonretirement assets, while they are immediately taxable, have the potential to enjoy favorable long-term capital gains rates of 15% in most cases assuming that the assets that have been sold have been held for more than one year. In addition, unlike losses resulting from sales of investments held within retirement plans that are non-deductible, the same losses in nonretirement plans are considered deductible capital losses.

One of the biggest advantages of nonretirement investments is the ability to control the timing of distributions and the associated exposure to income tax liability. This includes avoidance of required minimum distribution (“RMD”) rules. Beginning at age 70-1/2, with the exception of Roth IRA’s, you’re required to take minimum distributions from your retirement plans each year based on the value of each plan on December 31st of the previous year using an IRS table life expectancy factor, resulting in forced taxation. No such rules exist when it comes to nonretirement investments. In addition, unlike pre-age 59-1/2 distributions from retirement plans that are subject to a federal premature distribution penalty of 10% of the amount of the distribution, there are no such restrictions when it comes to nonretirement investments.

So what is the right mix of retirement vs. nonretirement investments? Read next week’s post to find out.

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Income Tax Planning Social Security

Increase Your After-Tax Social Security Benefits – Part 3 of 4

Retirement Income Center

Since it’s Super Bowl Sunday as I write this post, let’s discuss strategy as it pertains to winning the Social Security benefit game. If you want to be successful at increasing your after-tax Social Security benefits, you need to have a winning strategy. Hopefully you read Part 1 of this post and if you’re not yet receiving benefits, you’ve begun to implement your pre-benefit receipt game plan.

Once you’ve begun receiving your retirement benefits, there are two halves to winning the game when it comes to increasing after-tax benefits: (1) reduce taxable benefits, and (2) reduce the tax attributable to your benefits. If you’ve read Parts 1 and 2 and/or the previous two-part Say Goodbye to Up to 30% of Your Social Security Benefits series, you know that reduction of taxable benefits is all about minimizing the three components of “combined income,” i.e., (1) 50% of Social Security benefits, (2) adjusted gross income, and (3) tax-exempt income. Components #1 and #3 were addressed in Part 2.

Let’s turn our attention to component #2 – adjusted gross income, or “AGI.” As defined in Retirement Income Visions‘ Glossary, “adjusted gross income” is equal to gross income from taxable sources less deductions from gross income that are allowable even if you don’t itemize deductions. To the extent that you’re able to (a) reduce your gross income from taxable sources and/or (b) increase your deductions from gross income, you will reduce the amount of your adjusted gross income and, in turn, reduce your “combined income.”

Reduce Gross Income From Taxable Sources

Even though you can reduce your taxable Social Security benefits by reducing your gross income, why would you want to do this? After all, don’t you want to maximize your salary, self-employment income, pension income, rental income, partnership income, interest and dividend income, capital gains, etc.? Absolutely — with a caveat. Your goal should always be to maximize cash flow while minimizing taxable income. For those of you who receive annual Schedule K-1’s from entities in which you are a partner, shareholder, or limited liability company member, you know that quite often there’s a difference between what shows up on your K-1 as taxable income vs. the cash distributions you receive.

How do you reduce your gross income when you’re receiving Social Security benefits without negatively impacting your cash flow? Here are six ways to do this:

  • For taxable investments, i.e., nonretirement accounts, invest in immediate and/or deferred income annuities since a portion (sometimes substantial) of the distributions will be nontaxable.
  • Sell assets with unrealized losses to offset capital gains recognized earlier in the year.
  • Minimize distributions in excess of required minimum distributions (“RMD’s”) from self-managed non-Roth IRA retirement plans.
  • Minimize taxable Roth IRA conversions.
  • If you have net rental income from your rental property(ies), transfer mortgage balances from your home to one or more of your rental properties to increase your rental property interest deduction up to the amount of your net rental income. Even though your overall mortgage interest deduction may be unchanged, you may be able to reduce your taxable Social Security benefits.
  • Look for opportunities to sell properties that have passive activity loss carry forwards in order to recognize the losses.

Increase Deductions From Gross Income

When we think of tax deductions, what comes to mind most often are “itemized deductions,” including mortgage interest, real estate taxes, charitable contributions, etc. While these types of deductions reduce taxable income, they don’t reduce adjusted gross income. Although the opportunities in this area are limited, and assuming you’re not paying alimony, here’s three possibilities:

  • If you’re less than 70-1/2, maximize your IRA deduction.
  • If you’re self-employed, maximize your self-employed pension plan, i.e., SEP-IRA deduction.
  • If you’re not eligible for Medicare, establish and maximize contributions to a health savings account (“HSA”).

By the time you read this post, Super Bowl Sunday will be a memory. If you’re receiving Social Security benefits, your game and associated battle to reduce the taxation of your benefits is ongoing. Do you have a winning strategy in place to maximize your after-tax Social Security benefits?

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Roth IRA

Considering a Partial 72(t) Roth IRA Conversion? – Tread Lightly

Retirement Income Center

The topic of this week’s blog post is one which, quite frankly, doesn’t pertain to very many people. You may be wondering why I’m writing about it if this is the case. Besides bringing the topic to the attention of those who may be affected by it, the main reason I’m writing this post is to provide interested readers with an example of a tax planning strategy that, while it doesn’t run afoul of any IRS rules, hasn’t been officially blessed by IRS.

As with many of my blog posts, this one was inspired by one of my clients. Mr. and Mrs. R., who are retired, aren’t yet receiving Social Security benefits, and derive the majority of their income from Mrs. R.’s 72(t) IRA and two nonqualified term certain annuities, a sizeable portion of which is nontaxable.

For those of you unfamiliar with a 72(t) IRA, some brief background. Generally you must wait until age 59-1/2 to begin taking distributions from an IRA, otherwise you’re subject to a 10% premature distribution penalty in addition to any income tax liability on your distributions. IRS has carved out an exception to this rule whereby you won’t be subject to the 10% penalty if you receive a series of substantially equal periodic payments, or “SOSEPP,” from your IRA for the greater of five years or until you reach 59-1/2. A 72(t) IRA account is a traditional or a Roth IRA account from which a SOSEPP is being made.

While Mrs. R has been taking her SOSEPP for five years, she’s still about a year and a half from turning 59-1/2. If Mrs. R. discontinues her SOSEPP before she turns 59-1/2, IRS would consider this to be a modification of her SOSEPP. As such, Mrs. R. would be subject to a 10% premature distribution penalty on future distributions from her IRA. Furthermore, the 10% penalty would also be applied retroactively to all of the distributions she has already taken from her 72(t) IRA.

In addition to their 72(t) IRA and nonqualified annuity distributions, my clients recently sold a rental property at a loss of $26,000. After reducing their adjusted gross income by various itemized deductions, they were projected to have a 2010 taxable loss of approximately $25,000. While this would result in no income tax liability, without further income tax planning, this would be a potentially wasted opportunity to recognize additional income and still pay no income taxes.

How could my clients recognize additional income? While they could potentially sell securities at a gain in their nonretirement account, this would be offset by a sizeable capital loss carryover. The other option was to do a Roth IRA conversion of Mrs. R.’s 72(t) IRA. IRS regulations permit a full Roth IRA conversion of a 72(t) IRA provided that the IRA owner continues his/her 72(t) distributions from the Roth IRA account following conversion.

Since the value of Mrs. R’s. 72(t) IRA was approximately $280,000, the potential income tax liability attributable to a full 2010 conversion of Mrs. R.’s 72(t) IRA to a Roth IRA couldn’t be justified based on my client’s current and projected multi-year income tax planning even with splitting the reporting of Mrs. R.’s conversion income between 2011 and 2012. I calculated that Mrs. R. could do a partial conversion of $50,000 without incurring any income tax liability due to my client’s ability to use a net operating loss carryover that they couldn’t otherwise use in 2010. Furthermore, Mrs. R.’s conversion amount could be as much as $70,000 before my client’s marginal income tax rate would exceed 15%.

Since IRS has endorsed the full conversion of a 72(t) IRA to a Roth IRA, it would seem that there should be no issue with a partial conversion so long as the 72(t) payments continue following the conversion. Logically, the post-conversion 72(t) payment amount should be paid from both the original 72(t) IRA and the new Roth IRA accounts based on the allocation of the relative values of the two accounts. The problem is that IRS has provided no guidance on partial Roth IRA conversions of 72(t) IRA accounts, including the allocation of post-conversion 72(t) payment amounts.

Given this situation, while it isn’t logical, IRS could potentially challenge a partial Roth IRA conversion of a 72(t) IRA. If IRS were to prevail on this issue, as previously stated, future, as well as retroactive, 72(t) distributions would be assessed a 10% premature distribution penalty. IRS would also assess interest on any assessed penalties.

After consulting with Natalie Choate, a well-known attorney who specializes in estate planning for retirement benefits, I recommended to my clients that they consider doing a partial Roth IRA conversion of Mrs. R.’s 72(t) IRA in 2010, file a 2010 income tax extension application, and plan on recharacterizing, or undoing, Mrs. R.’s partial Roth IRA conversion by October 15, 2011, the extended due date of Mr. and Mrs. R.’s 2010 income tax returns, in the event that IRS doesn’t provide definitive guidance on partial Roth IRA conversions of 72(t) IRA’s by this date. (For an explanation of the recharacterization process, please see Recharacterization – Your Roth IRA Conversion Insurance Policy.)

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IRA Roth IRA

The Ideal Roth IRA Conversion Candidate – Part 2

Retirement Income Center

Last week’s blog post, The Ideal Roth IRA Conversion Candidate – Part 1, discussed two situations where it’s possible to convert a portion, and possibly all, of a traditional IRA to a Roth IRA while incurring minimal or no income tax liability attributable to the conversion. This week’s post presents two additional Roth IRA conversion “ideal candidates.”

As mentioned in last week’s post, all four situations, in addition to assuming availability of a traditional IRA, require preparation of an income tax projection, including calculation of potential exposure to alternative minimum tax, or “AMT,” to determine the amount of the traditional IRA that should be converted to a Roth IRA to achieve this result. The two situations that are the subject of this week’s post are as follows:

  1. Net operating loss
  2. Large charitable contribution deduction from establishment and funding of charitable remainder trust.

Net Operating Loss

If your deductions for a particular year exceed your income, which typically occurs from operating a business, you may experience a relatively rare tax phenomenon known as a net operating loss, or “NOL.” Generally, if you have an NOL, you are required to carry back the entire amount to the two years before the NOL year, unless you make an election to waive the carry back period, and then carry forward any remaining NOL for up to 20 years after the NOL year.

Your ability to use an NOL in a particular year is dependent upon the amount of your other income during the year. If you have an NOL, you may need to generate additional income to be able to utilize part, or all, of your NOL carry forward. If you are in this situation, an income tax projection should be prepared to determine the amount of traditional IRA you should convert to a Roth IRA to be able to utilize your NOL carry forward while incurring minimal or no income tax liability.

Also, if you have an NOL in the current year and are debating between carrying it back two years or making an election to relinquish the carry back period and instead carry it forward to next year, having a traditional IRA could be the deciding factor. While you may not be the ideal candidate for a Roth IRA conversion this year, the ability to offset income from a Roth IRA conversion with an NOL carry forward next year could prove to be quite beneficial.

Charitable Remainder Trust

Do you own any assets that you have been reluctant to sell because the sale would result in a large capital gain and sizeable tax liability? The establishment and funding of a charitable remainder trust, or “CRT,” is an income and estate planning technique that can be used to defer large capital gains while generating a large charitable contribution deduction in addition to providing portfolio diversification and an ongoing future income stream, making it a potent retirement income planning tool in the right situation.

The grantor of a charitable remainder trust is entitled to a charitable contribution deduction equal to the fair market value of the remainder interest of the property being transferred to the CRT. This deduction is limited to 30% of adjusted gross income (“AGI”), with the excess amount carried forward to future years. Given the size of the charitable contribution deduction resulting from establishment of a typical CRT, it isn’t unusual that a large portion of the deduction is unusable in the year of establishment of the CRT and must instead be carried forward.

If this is the case, an income tax projection should be prepared to determine the amount of traditional IRA that should be converted to a Roth IRA in the year of establishment of the CRT to generate additional AGI to free up an additional charitable contribution deduction that won’t result in an increase in income tax liability.

If you fall under one of the two scenarios above and it is projected that you will incur minimal or no income tax liability in connection with a partial or full Roth RIA conversion, you may be an ideal candidate for a Roth IRA conversion.

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IRA Roth IRA

Clearing the Roth IRA Conversion Hurdles

Retirement Income Center

Should you convert your traditional IRA’s to Roth IRA’s? This question is a hot topic this year with the repeal of the $100,000 modified adjusted gross income barrier for converting traditional IRA’s to Roth IRA’s. Last week’s blog post, Three Roth IRA Conversion “Show Stoppers” discussed three scenarios where the answer is a definitive “no.”

Assuming that none of the three “show stoppers” are applicable to your situation, you’re ready to lace up your running shoes and step onto the track. I liken the Roth IRA conversion decision-making process to the 100 meter (women) and 110 meter (men) high hurdles events in track and field.

Before discussing the various hurdles, once again it should be noted that a Roth IRA conversion doesn’t have to be an all-or-nothing event – you can do partial conversions over one or more years. The other important thing to keep in mind is that just because 2010 is the first year that you can convert your traditional IRA to a Roth IRA doesn’t mean that this is “the” year to do it. The hurdles discussed in this blog may be applicable to you this year, however, next year may be a totally different story.

Although the 100 meter, in the case of women, or the 110 meter, for men, high hurdles is a relatively short race, clearing ten hurdles 3.5 feet in height while running an all-out sprint is no easy feat. Likewise, there are three “high hurdle” situations when it comes to converting a traditional IRA to a Roth IRA as follows:

  1. Payment of Roth IRA conversion tax liability requiring liquidation of assets resulting in additional tax liability
  2. Withdrawals anticipated within five years of Roth IRA conversion
  3. Individuals with life expectancy of five years or less with no beneficiaries

Payment of Roth IRA Conversion Tax Liability Requiring Liquidation of Assets Resulting in Additional Tax Liability

One of the three “show stoppers” discussed in last week’s blog post was no source of funds for payment of Roth IRA conversion tax liability outside of retirement plans. If your nonretirement liquid assets, i.e., checking, savings, credit union, and money market funds are limited and you will need to sell securities to generate funds to pay the income tax liability attributable to a Roth IRA conversion, will you be creating additional income tax liability as a result of those sales?

If the result of your sale(s) will either be a capital loss or a capital gain that can be offset by either a capital loss carryover from the previous year or a capital loss generated earlier in the current year, then this isn’t problematic. If, on the other hand, your securities sales will result in a capital gain that cannot be offset by a capital loss, you will incur income tax liability in addition to the liability from doing a Roth IRA conversion. At a minimum, even if the securities that you sell were held for one or more years resulting in favorable long-term capital gains treatment, your tax liability from the capital gain will be at least 15% of the amount of your gain plus state tax liability. If significant, this additional tax liability on top of the tax liability attributable to the Roth IRA conversion could be a deal killer.

Withdrawals Anticipated Within Five Years of Roth IRA Conversion

Any distributions from Roth IRA conversions that aren’t attributable to non-deductible IRA contributions will be taxable as ordinary income if they’re taken within five years of January 1st of the year of the Roth IRA conversion.

If your situation is such that there’s a good chance that (a) you will need to take a withdrawal from your Roth IRA conversion within five years of January 1st of your Roth IRA conversion, (b) most of the distribution won’t be attributable to non-deductible IRA contributions, and (c) the income from your projected withdrawal isn’t projected to be sheltered by losses and/or itemized deductions or you aren’t otherwise projected to be in a lower tax bracket than in the year of conversion, a Roth IRA conversion probably doesn’t make sense. This is especially true if you will be less than 59-1/2 when you are projected to take your withdrawal since a 10% premature distribution penalty will be assessed in addition to the tax attributable to the income from your withdrawal.

Individuals With Life Expectancy of Five Years or Less With No Living Beneficiaries

Whenever analyzing the potential viability of a Roth IRA conversion, it’s important to keep in mind that, while the numbers may not favor a conversion if the analysis is based solely on the IRA owner’s life, this may not be the case when beneficiaries are considered, especially younger non-spousal beneficiaries, assuming that the Roth IRA isn’t projected to be depleted during the Roth IRA owner’s lifetime.

On the other hand, If you’re in a situation where either you’re very advanced in age or otherwise have a life expectancy of five years or less and you have no living beneficiaries who will inherit your IRA, the potential benefits to be achieved from a Roth IRA conversion probably won’t exceed the income tax liability attributable to the conversion in most cases.

So, you weren’t eliminated from the Roth IRA conversion game by any of the three “show stoppers” discussed in last week’s blog and you cleared all three “high hurdles” in this one. Are you a candidate for a Roth IRA conversion? Read next week’s blog post to learn the answer to this question.