|Richard Rubin and Margaret Collins|
Conversions from regular IRAs to Roth retirement accounts increased more than nine times in 2010, rising to
That marked the first time Roth conversions were greater than contributions. Conversions were especially common among IRA holders with annual incomes exceeding
The increase in conversions stemmed from a 2006 law that set 2010 for ending a
“There was a rush of interest in 2010,” when the restrictions on conversions were lifted, said
“It’s the cheapest estate planning you can find,” Rowley said. “You’re paying the taxes for these beneficiaries.”
Taxpayers also could split the taxes owed because of the conversions between their 2011 and 2012 returns, giving them until early 2013 before they had to pay the full balance. Wealth advisers pitched Roth conversions to their clients as a pay-now, save-later strategy.
Taxpayers with incomes exceeding
At the time, the Tax Policy Center estimated that the break would cost the government the net present value of
Both changes to Roth plan rules were a “classic budget timing gimmick,” said
“You know by its very design it’s going to be raising revenues now and losing revenues later,” he said. “It’s usually done purely for the purposes of meeting budget rules to appear to be generating revenues.”
Contributions to a regular IRA are tax-deferred, with up- front deductions and taxes owed when the money is withdrawn from the account.
In contrast, Roth accounts are built with post-tax money. Account holders owe no taxes when they withdraw the money and don’t have to make withdrawals once they reach age 70 1/2.
Assets in individual retirement accounts, known as IRAs, totaled
About 16% of U.S. households, or 19 million, have Roth IRAs compared with about 36 million owners of traditional IRAs in 2013, according to ICI. Roth IRAs, named for former Senate Finance Committee Chairman
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