Introducing the Wealthy to Roth IRAs

Advisors take heed: the income limit for those who can convert their retirement holdings from a traditional IRA to a Roth IRA (now applicable to anyone with a modified adjusted gross income of $100,000) disappears permanently in 2010, so high-net-worth folks–even Bill Gates–will be able to get a portion of their assets into a tax-free Roth account.

Advisors should be telling their high-net-worth clients about this opportunity now, suggests Gail Buckner, retirement specialist at Franklin Templeton Investments, because if advisors wait until the last minute, their clients will probably “hear it from someone else, and you don’t want to look like you don’t know this is coming.” The elimination of the income limit is a way, “particularly for high-net-worth clients, probably your most important clients, to get some of their assets into a tax-free Roth account,” Buckner says.

Clients should also be told about the coming change now so that they can start saving money to pay the tax bill, Buckner says, “because any dollars you convert in 2010, it’s going to be assumed, unless you elect otherwise on your tax return, that you’re not going to pay the income taxes due on this amount until you file your 2011 return, which happens in 2012, and your 2012 return, which happens in 2013.” So the IRS is giving taxpayers “as many as three more years to pay the taxes on this. You would pay 50% when you pay your 2011 return and 50% of the tax bill when you file the 2012 return; but because that doesn’t happen until 2012 and 2013, you still have time between now and then to accumulate the money you’re going to need.”

From 401(k) to Roth IRA