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Dec
30

Numbers to Know for 2010

With 2010 just around the corner, it’s time to get familiar with the key numbers that may affect your financial planning in the coming year. Below is a list of the essential numbers and phaseout ranges for 2010.

  • Maximum contribution to a Traditional or Roth IRA: $5,000 + $1,000 catch-up if age 50 or over (no change.)
  • Maximum contribution to a 401(k) or 403(b) plan: $16,500 + $5,500 catch-up if age 50 or over (no change.)
  • Maximum income to convert a Traditional IRA to a Roth IRA: No longer applicable. See my post on converting.
  • Income (modified adjusted gross income) phase out range for deductible Traditional IRA contribution, married filing jointly and covered by employer sponsored retirement plans: $89,000-$109,000 (no change.)
  • Income phase out range for deductible Traditional IRA contribution, married filing jointly and spouse covered by employer sponsored retirement plan: $167,000-$177,000.
  • Phase out range for deductible Traditional IRA contribution, filing single and covered by employer sponsored retirement plan: $56,000-$66,000 (no change.)
  • Phase out range for Roth IRA contribution, married filing jointly: $167,000-$177,000.
  • Phase out range for Roth IRA contribution, filing single: $105,000-$120,000 (no change.)
  • Social Security Cost of Living Adjustment: 0%
  • Annual gift tax exclusion: $13,000 (no change.)
  • Marginal income tax rates

Please note that this blog post is for educational purposes only and should not be construed as advice specific to your situation. You should get advice from a legal, accounting, or investment professional before deciding what course of action is appropriate for you.

Oct
28

Converting to a Roth IRA in 2010

If you are like many of my clients, you may be wondering if you should convert your Traditional IRA or old 401(k) to Roth IRA next year in 2010. As you may know, the income limitations for conversion are repealed in 2010, and you can choose to pay the taxes owed on a 2010 conversion over two years in 2011 and 2012. On the surface, it seems like a pretty sweet deal. And for many it is. However, it’s not in everyone’s best interest. How are you to know if it makes sense for you to convert? Here are some considerations.

  • If your income tax bracket is likely to be higher in retirement than it is today, you may be a good candidate for conversion.
  • If you think tax rates are on the rise, you are nearing or in retirement, and you do not expect your tax bracket to drop significantly, conversion may make sense for you.
  • When you convert, you have to report the converted amount as income and the additional income may push you into a higher tax bracket. Consider a partial conversion if this is the case.
  • You will need cash to pay taxes on the additional income if you convert. A good rule of thumb is to not convert if you don’t have the cash on hand from another source to pay the taxes owed from the conversion.

Generally speaking, I think it’s a good idea to be diversified from a tax perspective by holding both pre-tax (401k, Traditional IRA) and after-tax (Roth IRA, Roth 401k) retirement assets. It’s a way to hedge your bet, since no one truly knows what tax rates will be in the future.

However, taxes should not be your only consideration if you are thinking about converting. What you eventually plan to do with the money is also important. For example, if you plan to leave the money to your kids when you die, converting would allow you to grow the account throughout your life since Roth IRAs do not have required minimum distributions as do Traditional IRAs.

If you would like to more details on this subject, I suggest a FundAdvice.com article . If you would like to learn if converting to a Roth IRA makes sense for you, you are welcome to schedule an appointment.

Please keep in mind that this blog post is for educational purposes only and should not be construed as advice specific to your situation. You should get advice from a legal, accounting, or investment professional before deciding what course of action is appropriate for you.