2009 Tax Strategy V – Roth Plans

This is my fifth posting of a daily tax tip. This is about Roth Plans. There are many rules and exceptions so this blog is only intended as an introduction; you need to consult with your CPA for more detailed and individual advice.

As discussed in my last posting much Tax Planning (as it relates to retirement plans) has been focused on delaying tax to a future date believing tax rates will decrease. However, with the significant increase in the national debt, many tax professionals are beginning to question if that is still a valid assumption; taxes could increase in the future. In this case, the goal is to have as much income taxed in the current year. A Roth is a good vehicle to achieve this for contributions by the Taxpayer are not tax deductable, but income earned in the Roth is tax free at the later of the Taxpayer reaches 59 1\2 or the account has been in existence for five years.

Types of Plans: There are several types of Roth plans, an employer sponsored plan [401(k) or Roth 403(b) - known as tax-sheltered annuity] or an individual Roth IRA. There are similarities but a major difference being the employer-sponsored plans have employer matching of all or a portion of an employee contribution. The employer matching is pre tax and taxed when distributed.

Contribution Limits: For 2009, the contribution limits for a Roth IRA is $5,000 for Taxpayers under 50 and $6,000 for Taxpayers 50 or over. For an employer-sponsored plan, the limits are $16,500 for Taxpayers under 50 and $22,000 for Taxpayers 50 or over. Unused employee PTO can be used as a contribution to an employer sponsored plan.

Rollovers: Rollovers are allowed from non-Roth plans to Roth plans, but special rules apply including Adjusted Gross Income [AGI] limitation of $100,000 in 2009 [There is no AGI limitations in 2010]. This is a good feature if a Taxpayer’s goal is to tax as much income as possible in the current year. However, a word of caution is need here. If a retirement account funded by pre-tax dollars is rolled over into a Roth, taxable income will increase and could place the Taxpayer into the Alternative Minimum Tax [AMT] and effect the qualification of some popular tax credits,

AGI limits: Contribution to a Roth IRA are phased out starting at $167,000 for married filling a joint return and $105,000 for all others, except for married filling separate returns. For them the phase out starts at zero income and is eliminated at AGI of $9,999. However, there are no AGI limitations for an employer-sponsored plan.