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Thursday, April 25, 2013

The New Tax Law and Roth’s

At the last minute, our lawmakers in Washington avoided the “fiscal-cliff” with The American Taxpayer Relief Act.  While it is hard to determine who exactly will be getting the “relief”, it does appear to create new reasons to look at Roth IRAs and Roth 401(k)s.

If your company 401(k) plan does not currently allow for Roth deferrals, the new law creates a new incentive to add that provision.  Current 401(k) participants will be allowed to make conversions within the plan more easily.  Before the new law, only those eligible for qualified distributions could make conversions.

Because qualified Roth IRA and Roth 401(k) distributions are tax free, they have been an excellent way to diversify your future tax exposure compared to other taxable options.  Also, the new higher tax bracket and new Medicare taxes on investment income create added incentive to consider Roth accounts in your planning.

As is always the case, retirement and tax planning is very individualized.  For those considering a conversion of funds from their employer’s retirement plan to a Roth IRA, they should be aware of the tax liability for such a conversion, as any amount converted will be subject to the current income tax rate.  Depending upon your financial situation, taxes may be due either the year of conversion or the year after.  In addition, if the funds are invested in positions in the plan that cannot be transferred, they would have to be liquidated, which may incur trading fees.  Prior to utilizing such a strategy, please see your tax advisor as LPL Financial, nor its investment representatives, provide tax advice.