Trusts and Estates: Roth Accounts

Recent changes in the tax law allow even those who were previously excluded from Roth accounts to participate in the tax advantages they offer.

Roth retirement accounts have two principal advantages over non-Roth accounts. First, the assets of a Roth are not subject to income tax when distributed. In addition, unlike retirement accounts that require certain minimum distributions starting at the age of 70½, there is no required beginning date for the distributions from a Roth account, allowing for tax-free growth to continue.

Employers may now elect to offer employees a Roth 401(k) option. If the option is offered, employees may begin contributing to a Roth 401(k) account without income restrictions.

Currently, eligibility requirements prohibit you from converting your regular IRA to a Roth IRA if your annual household income exceeds $100,000. Beginning in 2010, the income restriction for converting will be eliminated. For high income individuals who have been (and still will be) ineligible to contribute to a Roth IRA, this change creates a way to take advantage of the benefits a Roth IRA may have to offer.

To convert to a Roth account, you would be required to pay taxes on the conversion amount, which may be paid over a number of years. Nevertheless, if you believe that the value of your retirement assets will increase prior to withdrawal, and you think your tax bracket when you retire will be the same or higher than your current tax bracket, conversion could result in substantial tax savings.

Given the complexity of these situations, we recommend that you contact an attorney in our wealth management practice to discuss your particular situation.