current tax rates gives wealthy taxpayers the equivalent of an interest free loan

Investors in traditional IRA accounts to pay taxes up front on conversions to Roth IRA to get tax-free withdrawals later. Employees in tax brackets higher than expected rates to rise next year faced reporting additional income of all conversions in 2010, its profitability. With the tax laws, and rich savers may differ and the use of tax dollars to win something, according to Christine Fahlund, a senior financial planner with Baltimore-based T. Rowe Price Group Inc. as The extension of existing tax rates, gives the wealthiest taxpayers the equivalent of an interest free loan if you convert a regular Individual Retirement Account to a Roth December 31.

"It is the business of the century," said Ed Slott, a certified public accountant in Rockville Centre, New York, and founder of irahelp.com website. "It's as if Congress is giving an interest free loan to build a savings account tax free."




This year taxpayers can choose to report the taxable amount of the conversion in 2010, or split equally between 2011 and 2012. Federal tax rates income is expected to increase in 2011 up to 39.6 percent, compared to 35 percent when the tax cuts instituted by President George W. Bush, due to expire.
The Senate approved a plan of 858 billion U.S. dollars of tax cut on Dec. 15 to keep rates of income tax applicable to all workers through 2012. The House voted 277-148 for final approval despite the fact that many House Democrats wanted to limit the extension of tax cuts to the first $ 250,000 of family income. President Barack Obama is expected to sign the measure into law this afternoon.
Tax brackets

That means that a taxpayer in the higher income with an IRA worth $ 1.2 million are likely to pay 35 percent or $ 420,000 in federal taxes by converting the entire account to a Roth IRA this year, according to Fahlund . $ 475,200 would have been paid if the rates of income tax in 2011 increased 39.6 percent, or $ 55,200 more in taxes.

Conversions better job savers know they will be at the top or highest tax brackets in the future, and can pay taxes with money from outside the IRA, said James Lange, a Pittsburgh-based CPA and author "The revolution Roth: pay taxes once and never again."
Defer income from conversions made this year makes sense for most taxpayers who will be in the same tax bracket or less in 2011 and 2012, said Slott, the accountant.
New York Taxpayers

For taxpayers in New York, there is an additional potential benefit of delaying said Mitch Drossman, national director of the planning strategies of wealth in New York, USA Trust, which manages about $ 300 billion in client assets. New York State tax rates on income increased to a maximum of 8.97 percent from 6.85 percent in 2009 and are scheduled to fall again to 6.85 percent in 2012. This means that savers can defer income to a time when they may have lower tax rates, Drossman said.

The Internal Revenue Service income restrictions lifted this year's conversion to the Roth IRA Traditional IRA accounts, ie, taxpayers who earn more than $ 100,000 a year in adjusted gross income can make the change. There is no limit on the amount that can be converted to a Roth IRA from a traditional IRA.

It is too early to know whether taxpayers are choosing to report the income in 2010, 2010 conversions, your declaration or wait until 2011 and 2012. They have until April 15, 2011, more than any of the extensions to decide, said Fahlund of T. Rowe. The company saw an increase of more than four times the number of investors turn to November 2010 compared with the previous year, he said.

Increasing Conversions

Vanguard Group Inc., headquartered in Valley Forge, Pa., has seen a fivefold increase in the number of conversions to Roth IRA this year to about 150,000 by the end of November compared with 2009, said Mary Bruno, who specializes retirement and retirement income for the largest U.S. investment fund manager. USAA in San Antonio has seen a fourfold increase in the membership of the conversion of part or all of your traditional IRA assets to a Roth IRA in October, said Kevin O'Fee, USAA assistant vice president of retirement strategy.

The taxes due on switching to a Roth IRA from a regular IRA will depend on whether the assets being transferred are pre-or after-tax dollars. If tax-free dollars are included, the rate converters pay income tax on a percentage of the conversion amount, says Slott, the accountant.
Savers who expect to be in a lower tax bracket in 2010 than in 2011 or 2012 should not postpone the entry of the conversion, said David M. First, a tax partner at accounting and consulting firm Marcum LLP in New York. And those who will be affected by the alternative minimum tax in 2010 and not 2011 and 2012 also may want to report the income in the year 2010, First said.
Partial transfers
Since the default established by the IRS for changing is to divide the revenues between 2011 and 2012, wealthy taxpayers who choose to defer not to do anything, according to John Bledsoe, founder of John Bledsoe Associates, goods and tax planning firm in Dallas, Texas, whose clients have an average net worth of at least $ 10 million.

"For most people, are advised not to make now is like telling them not to use a seat belt while driving," said Bledsoe. "There is no logic to do so."
When converting to a Roth IRA, savers should try to avoid converting much in one year that blows in a higher tax bracket, said Fahlund of T. Rowe. One option is to make partial conversions so the income is lower, he said.

Investors later change your mind about a Roth IRA has until October 2011, to undo the change. Savers can also create more than one Roth IRA to invest in stocks and bonds separately so you can undo a certain part of the conversion, if one asset class performs poorly, said U.S. Drossman Trust.
Donations

For savers aged 70 ½ and over, the bill includes a tax provision that allows them to give up to $ 100,000 from a traditional IRA directly to charity without incurring tax.
In 2010, donors had to include the distribution of income and received a charitable deduction on income tax of their gifts. The bill would restore income exclusion retroactive to early 2010 and extend to 2011, said Kim Wright-Violich, president of San Francisco, Schwab Charitable.