This is the year to convert retirement funds to a tax-free Roth IRA.
That was the advice of Lee Zink, manager of Mauch Chunk Trust Company's wealth management division, at a presentation during the breakfast mixer held Wednesday by the Tamaqua Area Chamber of Commerce.
The mixer, which was sponsored by Mauch Chunk Trust, was hosted by the Tamaqua Elks Lodge.
Mike Prock, manager of Mauch Chunk Trust's Hometown branch, introduced Zink, who detailed the differences between tax deferred and tax free retirement plans.
Most retirement plans are tax deferred, such as 401 K's and involve payroll deductions that lower one's current taxable income. However, one will have to pay the tax on those funds someday.
"With a tax deferred plan, if you don't touch it, when you reach the age of 70 and a half, you will need to take an RMD (required mininum distribution," said Zink.
A Roth IRA (Individual Retirement Account) is a tax free plan. "You put after tax dollars into a Roth, and you won't get a current tax deduction, but you get a tax free distribution later," said Zink. "The earnings grow tax free. Money taken out of a tax deferred plan will get taken as income."
Additionally, Roth IRA's have no required minimum distributions. "That makes them excellent for estate planning," added Zink.
For 2010, the Internal Revenue Service (IRS) has made some changes in regulations for Roth IRAs that makes converting other retirement funds to a Roth more favorable.
"Before this year, there were restrictions in the past," related Zink. "Only for married couples filing taxes jointly or singles could do conversions. Those with incomes in excess of $100,000 could not do conversions."
This year, however, those restrictions in filing and income status have been repealed.
"The tax ramifications are, typically, when you convert from pre-tax to after tax dollars, traditionally, in the year of conversion, taxes are due.
"In 2010 only, you don't have to pay taxes in the year of conversion. You can include half of the distribution for 2011 and half for 2012. You actually have the opportunity to plan for the tax liability over a three-year period," he noted.
The option remains to pay the tax liability in 2010, but spreading it out over three years is an excellent planning tool. "When you look at it, it makes a lot of sense," stated Zink. "You have the power of tax free compounded growth, and that could be quite significant. For estate planning, it allows you to leave a tax free legacy down through generations of the family."
The conversion allows for tax control in avoiding social security tax, which is another plus, said Zink.
"It's not too often the IRS gives us a gift," added Zink, who suggested speaking with a financial planner or advisor before making a Roth IRA conversion.
In other business, Linda Yulanavage, executive director of the chamber, introduced Amanda Kalce, the chamber's new administrative assistant.
Yulanavage also mentioned a course, Communicating Like a Leader, which is being offered by Lehigh Carbon Community College on March 11 and 18. The course is being offered to chamber members at a substantial discount.