Wallis & Aho - Tax Services, Accounting

Tax Tips

Anyone who has a regular IRA should be aware of the new Roth IRA and associated roll-over provisions.

During 1998, there was a fairly well publicized new provision in the tax code allowing regular IRA’s to be rolled over into Roth IRA’s. When this was done, the IRA owner recognized the amount rolled over as ordinary income. In 1998 there was an option to recognize that income over a 4 year period. Although tax had to be paid, there was no penalty for premature distribution.

What you may not realize is that in 1999, you may still roll-over regular IRA amounts to Roth IRA’s without penalty. There is no 4 year spread option, but (and here’s where the TIP comes in) you may still be well-advised to make a roll-over when your situation is such that you would pay no tax, or tax at a low marginal rate, on the roll-over amount. For example, one of a two-earner couple may have taken some time off for small children, or a person may have become disabled, unemployed, or for some other reason found him or herself in a low tax situation. This is not a casual situation to analyze, but if you think you may benefit from such a tax plan, now is the time to look at your situation and get some advice from a tax advisor.

Why bother about this? Well, the rationale behind opening an IRA in the first place was to defer (not pay) tax on the money now, because it was put away for retirement. When you retire, and withdraw the money, you will be in a lower tax bracket than you are now (at least that’s the plan). Many people have found that money they put away, and saved 45% tax on in 1984, is now being taxed at only 28%. And, many people find that money they saved 15% tax on in 1989 is now being taxed at 28%. Predicting future tax brackets is predicting, at its purest.

Planning, on the other hand, means looking at money that was put away for retirement recently, hopefully at a tax savings of at least 28%, and considering whether or not there is a better way to hold that investment. If you are, in fact going to have a 15% tax bracket in 1999, you may well want to roll-over a few thousand at 15%. You will have already realized a 13% tax savings, and now your retirement nest-egg (the part that’s in the ROTH) will be able to grow and eventually be distributed tax-free. At least, that’s the plan.

And Another Thing:

Some people have actually made the mistake of funding an IRA that did not save them anything in taxes! If your income tax situation is such that you get ALL of your withheld tax money back and/or earned income credit, you should NOT be investing in a regular IRA! That is not to say that you should not save for retirement. Saving for retirement is always a prudent and commendable thing to do. BUT if a regular IRA does not save you tax dollars, it is not a good idea. Money put into a regular IRA will be taxed later-whether or not you realized a tax savings in the year you put it in. Money can still be saved in a regular bank account! There may be tax on the earnings, but there will not be any tax or penalty if you need to tap into that savings for an emergency! The new ROTH IRA can be a good choice, too. ROTH IRA contributions DO NOT save current taxes, but they lock your retirement savings up, and the earnings will never be taxed, because distributions from ROTH IRA’s (after age 59 1/2) are not taxable. At least, that’s the plan!

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Wallis & Aho, Enrolled Agents
P.O. Box 3468
Lantana, FL 33465-3468
Voice: (561) 547-9950
E-Mail: wallaho@bellsouth.net
URL: http://www.wallisaho.com

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