» Estate Planning Attorney With Hook Law Center Explains Roth IRAs, Conversions, and Recharacterizations

Estate Planning Attorney With Hook Law Center Explains Roth IRAs, Conversions, and Recharacterizations

Virginia Beach, VA (Law Firm Newswire) November 18, 2013 – Workers may convert individual retirement accounts (IRAs) from traditional to Roth IRAs, but some who do so will later undo that conversion.

Hook Law Center (formerly Oast & Hook)

Hook Law Center (formerly Oast & Hook)

Roth IRAs present certain advantages and disadvantages versus traditional IRAs, and each year, many people elect to make the conversion to Roth. When current circumstances or expectations for the future change, as they so often do, that conversion may be undone in a process called “recharacterization.” Estate planning attorney Andrew Hook explains why people convert or recharacterize their accounts and the rules governing the processes.

“Contributions to traditional IRAs are tax-deductible,” Hook said. “Contributions and earnings are taxed when withdrawn, during retirement. Traditional IRAs work well for the many people who expect to pay lower tax rates in retirement than they do while employed.” Roth IRAs work differently and are better-suited for a different type of investor.

“Contributions to Roth accounts are made with after-tax dollars – contributions do not lower your tax liability,” Hook went on. “However, withdrawals of contributions and earnings in retirement are tax-free. Roth IRAs are popular among those who do not expect their income, and therefore tax rate, to drop significantly in the future.”

Accordingly, investors might choose to convert from traditional IRAs to Roth IRAs if their expected future tax liability increases with respect to their current tax liability.

“Conversions were very popular among high earners toward the end of 2012 because of the upcoming higher tax bracket for income over $400,000,” Hook said. “Earlier, conversions had seen a huge increase in popularity in 2010, when income limits preventing high earners from converting were lifted.”

Conversion incurs a tax liability, because the funds in a traditional IRA have not been taxed. Using the funds within an IRA to pay the cost of conversion is undesirable, because it counts as an early withdrawal, which incurs a penalty of 10 percent.

For those who convert to a Roth IRA only to later change their minds, a reversal of the conversion, or re-characterization, is allowed, if completed by October 15 of the following year. Another conversion after a re-characterization is permitted in the year after the first conversion, as long as 30 days have passed since the re-characterization.

“An example of someone who might wish to re-characterize their IRA after a conversion is an individual who got laid off or took a large pay cut,” Hook explained. “Their tax rate likely went down, so if they re-characterize, they can later redo the conversion at their new, lower tax rate. In the meantime, recovering the taxes they paid will increase their liquidity.”

Another situation where re-characterization is desirable is if the value of account holdings drops significantly following a conversion. By re-characterizing the account and converting the lesser amount later, investors can incur a lower tax bill.

Hook Law Center
295 Bendix Road, Suite 170
Virginia Beach, Virginia 23452-1294
Phone: 757-399-7506
Fax: 757-397-1267

SUFFOLK
5806 Harbour View Blvd.
Suite 203
Suffolk VA 23435
Phone: 757-399-7506
Fax: 757-397-1267
http://www.hooklawcenter.com/

  • Beware Hospital “Outpatient” Observation Status
    Picture this: You’re 80 years old and you suffer a fall that lands you in the hospital for a week. At the end of your stay, you are discharged to a rehab facility for three weeks of rehabilitation and skilled nursing care. The time you spend in the hospital and at rehab is stressful, but […]
  • Exceptions to Medicaid Estate Recovery
    A large number of clients worry about the consequences of utilizing Medicaid to pay for long-term care. Most importantly, they have received information from non-legal professionals that Medicaid will take their home or that the spouse will be impoverished. The good news is that with proper planning your entire estate may be free from estate […]
  • Issues to Consider when Your Child Goes off to College
    It’s February, folks. That means that college acceptance letters will soon be arriving via email, snail mail or however they get around these days. Once the initial euphoria has worn off and you know that your child is definitely going to college and you have made peace of a sorts with how you are going […]
  • Commonly Overlooked Tools for Incapacity Planning
    Every individual should have a plan for when they can no longer make decisions for themselves effectively but most delay planning because it entails the confronting their fears about disability, death, and dying. As the U.S. population ages in greater numbers due to aging baby boomers and increased longevity, the marketplace has responded to the […]
  • Will Medicaid Take My House?
    We hear this question all the time: “If I apply for Medicaid, will they take my house?” The answer is no; however, there are certain situations in which your home may be counted against you in determining whether you have too many available resources to meet the financial qualifications for long-term care Medicaid.  If the […]

See other news sources publishing this article. BETA | Tags: , , , ,



Get headlines from Law Firm Newswire sent right to your inbox.

* indicates required