Roth Right Now

The Roth topic continues to be popular in the retirement planning arena.

For 201 1 , the maximum Roth Individual Retirement Account contribution remains at $5,000 ($6,000 for individuals age 50 or older). The adjusted gross income phase-out for married couples filing a joint return begins at $169,000. No contribution is allowed if the mAGI is $179,000 or more. The phase-out for single taxpayers begins at $107,000. No contribution is allowed if mAGI is $122,000 or more.

The maximum Roth 401(k) contribution is $16,500 ($22,000 for individuals age 50 or older). There is no income limit.

2010 was an important year for Roth conversions, as the $100,000 income limit was eliminated. Many individuals took advantage of this and converted all or part of their traditional IRAs to Roth IRAs. For conversions executed in 2010, the payment of taxes could be spread over two tax years ? 2011 and 2012. For 201 1 (and beyond), there is still no income limit to do a Roth conversion. However, the taxes due on the conversion must be paid in one year, and cannot be split over multiple years.

As of 2006, 401(k) plan participants can convert their accounts directly to Roth IRAs. Plan sponsors of 401(k) and 403(b) can now allow participants to convert their traditional 401(k) accounts to Roth 401(k) accounts. In order to do this in-plan conversion, the plan must have the designated Roth option. This conversion is very similar to a Roth IRA conversion. There are, however, two very important differences: A plan participant must be eligible to take a distribution from the plan. If a client has separated from service, he/she should be able to do a conversion. For individuals currently employed, the plan must allow inservice distributions. Second, there is no recharacterization provision. Therefore, this type of conversion cannot be undone.

Roth accounts are appropriate for some, but not all, clients. With a traditional IRA, contributions may be tax-deductible, earnings are taxdeferred, and there are no income limits for contributions. However, minimum distributions will be required (generally at age 70 1/2).

Traditional IRA distributions may adversely impact the taxability of Social Security benefits, Medicare Part B premiums, and trigger income for beneficiaries following death.

The biggest advantage of a Roth IRA is that distributions can be tax-free. Therefore, there is no negative impact on Social Security benefits or Medicare B premiums, and no income for beneficiaries. Furthermore, there are no required minimum distributions for Roth IRA owners. Ho wever, there are adjusted gross income limits for contributions, so some clients cannot contribute.

It’s also important to note that converting a traditional IRA to a Roth IRA is a taxable event.

There is an additional consideration when thinking about the Roth. Roth IRA assets can be invested in a variable annuity. If the annuity has a living benefit (available for an additional cost), clients can receive guaranteed tax-free income that they cannot outlive. This combination enhances the power of the Roth, which could be very important in these times of uncertainty in the federal tax environment.

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For 2011 (and beyond), there is Still no income limit to do a Roth conversion.

Contributor Jill Perlin is vice president of Client Effectiveness and Education with Prudential Annuities, She may be reached at jill.perlin@prudential.com