The Internal Revenue Service has opened the door for older, wealthier individuals to convert their traditional IRAs into Roth IRAs.
Previously, individuals earning more than $100,000 in a taxable year were barred from rolling assets from a traditional IRA into a Roth. As of January 1, 2005, however, the IRS no longer includes a person’s required minimum distributions from qualified retirement plans or IRAs when determining the taxpayer’s modified adjusted gross income (AGI).
For instance, take an individual who’s had a $115,000 modified AGI over the last few years, says Michael Hatlee, manager of retirement services at Chemung Canal Trust Company in Elmira, New York. “Due to the required distribution rules that apply to qualified plans and IRAs, this person had to take $30,000 per year from their IRAs.” This year, “assuming that the income assumptions remain the same, they will now be eligible to convert a traditional IRA to a Roth because that $30,000 required minimum distribution no longer counts toward the modified adjusted gross income limit,” he says. “Instead of the $115,000 modified AGI for these purposes, they now have an $85,000 modified AGI, which makes them eligible to convert to a Roth IRA.”
Hatlee says the new rules provide a great estate planning tool for wealthy IRA owners. For individuals with “substantial assets and other sources of income [that] really don’t need or use the required minimum distribution from a traditional IRA, converting a portion or all of that traditional IRA to a Roth quite often results in much more being passed on to their heirs,” Hatlee says. So that estate planning tool, “which has always been around,” he notes, is now available to more individuals.