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Roth Conversions: One Way to Pay Taxes Now, Before They Go Up

time is money.jpgMany of our clients are looking for ways to take advantage of the generous gift and estate tax exemptions available in 2012. If you can afford to do so, making an outright gift or gift in trust this year is a great idea because up to $5.12 million dollars per donor will pass free of gift tax. All subsequent appreciation of the gifted assets will be in the recipient’s estate, and not yours. That’s one great way to take advantage of today’s tax environment.

And here’s another, less obvious, one: consider converting your existing Individual Retirement Accounts (IRAs) or 401-Ks to Roth IRAs or Roth 401-Ks. When you convert your existing retirement accounts to their Roth equivalents, you’ll pay the income tax due on those assets at today’s rates. If you think that income tax rates are likely to rise in the future, as many do, now would be a great time to get that bill paid. Even better, ROTH accounts do not have the required minimum distribution requirements that traditional IRAs and 401-K accounts have, so you can convert the account, pay the income tax, leave it alone, and eventually, leave the account to your children. When they inherit the ROTH account, your children must begin to withdraw the funds, but those funds come out of the account free of income tax. Of course, the rules are complicated and you need to discuss this thoroughly with your financial advisors and accountants before you leap into a conversion, but it’s certainly food for thought.