On February 17, 2010, Harold Gianopulos Jr. presented “The Benefits and Pitfalls of Converting Traditional Qualified Plans and IRA Assets to Roth IRA Assets,” as part of the Center’s Employee Benefits Lunch & Learn Series. Gianopulos spoke on the differences between traditional and Roth IRAs, and addressed both the income and estate tax planning implications of converting traditional IRAs into a Roth IRA. Gianopulos, principal and senior financial advisor at Kovitz Investment Group, received his JD and his LLM in Tax Law from The John Marshall Law School.
Harold Gianopulos Jr. (JD ’99, LLM ’05), principal and senior financial advisor at Kovitz Investment Group, presents “The Benefits and Pitfalls of Converting Traditional Qualified Plans and IRA Assets to Roth IRA Assets.”
Gianopulos explained that Roth IRAs were introduced in 1998, and are governed by Internal Revenue Code §408A. Unlike traditional IRAs, participants contribute post-tax income into their accounts. These post-tax contributions allow earnings in the account to grow tax free. Distributions or withdrawals from the account are not taxed as long as they are qualified.
Additionally, Roth accounts are not subject to the required minimum distribution rules at age 70 1⁄2, allowing owners to continue to grow earnings well beyond retirement. The 2010 deduction limitation for both traditional and Roth IRAs is $5,000, and the catch-up contribution limit is $1,000 for individuals over age 50. These amounts are independent of the limits on qualified plan contributions.
“Gianopulos detailed the advantages and disadvantages of Roth IRA conversion, and explained that since each situation is different, conversion is not beneficial for everyone.”
A recent change in Roth IRA conversion rules created the opportunity for greater tax planning options at retirement. Before 2010, limits were placed on married individuals whose modified, adjusted gross income exceeded $100,000 in the year of conversion. Roth conversions after December 31, 2009, however, are no longer subject to these limitations. Conversion amounts can come from several sources, including traditional IRAs, SEP IRAs, SIMPLE IRAs, or qualified plan distributions. Amounts converted into a Roth IRA are taxable at the time of conversion. In order to receive distributions on these converted amounts, they must remain in the account for a five-year holding period, or are subject to an additional tax upon withdrawal. Conversion amounts are fully taxable when converted. An individual has the option of undoing the conversion by later re-characterizing the amounts for any reason, subject to timing limits. This flexibility allows for individuals to decide if a Roth IRA is right for them.
By Venessa Vargas JD/LLM in Employee Benefits candidate
Gianopulos further detailed the advantages and disadvantages of conversion, and explained that since each situation is different, conversion is not beneficial for everyone. The tax benefits are evident, because taxes are paid at the time of conversion, amounts accumulate tax free, and participants do not pay taxes on these amounts on qualified distributions. Roth IRAs provide individuals an alternative account for hardship situations where money might otherwise be unavailable for withdrawal. Exclusion from the required minimum distribution rules provides several estate planning incentives. Money is not being forced out of the plan and can continue to accumulate over the individual’s lifetime, as well as that of their spouse or children if they so choose, while reducing the size of the individual’s estate and maximizing wealth. But these benefits come at a price. Depending on an individual’s need and tax bracket, the current payment of income tax may not be beneficial. The generous rules that now cover Roth IRAs, as well as the tax rules, could change without warning thereby altering these incentives.