Does a Roth IRA Conversion for 2010 make sense?

FOR IMMEDIATE RELEASE
(Free-Press-Release.com) March 19, 2010 --

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Does a Roth IRA Conversion for 2010 make sense?

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http://www.execplanexpress.com

For 2010 anyone who is considering rolling part or all of their conventional IRA into a Roth IRA should consider using a personal financial planning software like the recently released ExecPlan Express 2010 to evaluate whether an IRA Roth conversion makes sense. Individuals who do a Roth IRA conversions in 2010 can elect to defer the taxable income and split it over 2011 and 2012. This option has not been available in previous years and may or may not provide a measurable tax savings to consumers. At first glance there are two distinct benefits to a Roth conversion in 2010. First you will postpone you tax obligation until 2011 and 2012, this essentially provides a interest free loan on the income tax owed for up to two years. The second benefit is that since the income is “split” over two years you will most likely face a lower tax liability than if taken all in one year. Assuming that the individual is not in the top income tax bracket, the “splitting over two years allows less income from being pushed into a higher tax bracket that usually occurs if you take the income all in one year. There is a catch. The tax “rates” for the tax brackets for 2010 are significantly lower than the tax “rates” that are scheduled for 2011and 2012. This means that by taking the income in 2011 and 2012 you may be in lower brackets than you would be if you took it all in 2010, but you actually may pay a higher tax rate and thus actually paying more in taxes.

To evaluate if you should take the tax all at once or split over 2 years you need to first determine if it makes sense to do an IRA Roth conversion at all. This cannot be done using simple Roth conversion software. These retirement planning tools are usually free at most investment sites, but as the saying goes, you get what you pay for. These sites provide these tools as a way to market other products or services. The downside is that these Roth conversion calculators do a simplistic analysis that does not reflect the progressive nature of our tax code or incorporate other income you may be earning that will impact your tax obligations from an IRA Roth conversion.

If you want to find an accurate solution you need to look at a financial planning software packages that professional advisors use. A good financial planning tool should focus on fundamental retirement planning projections that incorporate an actual federal and state income tax analysis with year by year cash flow projections of assets, income and expenses. It should allow the user the ability to specify how much to rollover and when, so as to see different “what If” scenarios. All of this is important because often forgotten is that even if it might make sense, the individual needs to have the capital to pay the income tax from the Roth IRA conversion. You cannot use part of the money from the Roth IRA conversion to pay the tax, thus many people find themselves with a big tax bill and not enough cash on hand to pay the tax man. Professional financial planning software like ExecPlan Express will not only allow you to determine if a Roth conversion makes sense from a tax and net worth point of view, but whether you can afford it from a cash flow point of view.

In addition professional financial planning software will also provide you the ability to look at the other advantage to a Roth IRA, estate tax planning. For a lot of individuals, especially those in higher income tax brackets where a Roth IRA conversion may not make any sense from an income tax perspective, it may make sense for estate tax planning. Assets in qualified plans are typically difficult to manage for estate planning, however liquid assets including Roth IRAs provide more options down the road in terms of estate planning strategies. This makes professional financial planning software even more attractive than simple retirement calculators or Roth IRA calculators because it allows you a window into other aspects of your financial profile. ExecPlan Express financial planning provides a free trial version at their website www.execplanexpress.com that will allow you to evaluate whether the conversion makes tax sense as well as what impact it may have on your estate, investment or retirement planning goals .

More information can be found online at http://www.execplanexpress.com

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