Self-Directed IRA Investing

By now you are probably aware of the new rule permitting conversion from a traditional IRA to a Roth IRA, regardless of your income or tax-filing status. This ruling, effective January 1st, 2010, also allows you to spread the tax impact of the conversion over three years-skipping 2010 altogether and splitting the tax between the 2011 and 2012 tax years. This combination of incentives is encouraging a lot of IRA owners to convert to Roth IRAs.

Some other important things to know about Roth IRA conversions:

1) You don’t have to have earned income (e.g., you can be retired) to convert a traditional IRA to a Roth IRA;

2) You can convert any number of traditional IRA(s) to any number of Roth IRA(s). In fact, tactically, you might be better off doing so if you have a diversified portfolio because, if post conversion, one of your converted Roths declines in value (after you had incurred a tax liability from the conversion at a higher value) you can “undo” the conversion (called a “recharacterization”), as if it never happened, up until October 15th of the year following conversion without tax or penalty. If all of your conversions are to a single Roth IRA you cannot pick and choose which asset(s) you are recharacterizing. Also, if you later decide to combine separate Roths (e.g., because they all appreciated after conversion and thus there is no longer a benefit in converting) you can combine them into one Roth at that time;

3) If you want to withdraw funds from a Roth IRA that was created as a result of a conversion, you need to know that there are ordering rules for the distributions that could result in taxes and possible penalties. First, if you take a withdrawal post conversion before turning age 59.5, you will not pay tax on withdrawals from this amount , but you will pay a 10% penalty if the withdrawal occurs within five years of the conversion (also each conversion has its own five-year waiting period). If you are over 59.5, this penalty does not apply. Also, if you are under 59.5, you will pay taxes and the 10% penalty on any withdrawals of earnings on the amounts contributed or converted to the Roth IRA. When making withdrawals, contributed amounts, converted amounts, and then earnings are considered, in that order, against the amount taken, to determine whether taxes or penalties are due.

If you have any questions about this new opportunity you may write to “takecontrol@pensco.com”.