Also: Finance bill excludes extension of COBRA subsidyIn 2010, for the first time, anyone –regardless of income – can convert traditional Individual Retirement Accounts to Roth IRAs.
Many financial planners say the Roth IRA is a useful tool to have in a portfolio. But they caution that if an individual converts a traditional IRA to a Roth, he or she will have to pay federal income tax on any pre-tax contributions as well as on any growth in the investments value. Once converted to a Roth, of course, all the investment can be withdrawn tax-free once conditions are met.
The account holder in a transfer can opt to pay all the tax in 2010 or half in 2011 and half in 2012.
But if the person considering a transfer plans to live off the account funds, they may make the most out of a traditional IRA and leave the money where it is.
One major concern for not converting from a traditional IRA to a Roth is that the income taxes for high-income individuals may be pushed to a future generation at higher rates. And one of the factors that could play a role is if Congress, as expected, doesn’t extend the Bush tax cuts.
If not, tax rates will revert to 2001 levels, raising the top four brackets to 39.6 percent, 36 percent, 31 percent and 28 percent from what they are now, 35 percent, 33 percent, 28 percent and 25 percent.
If, for instance, an IRA had $8 million and the account holder died, the estate would be taxed at 45 percent.
Then, assuming the children or beneficiaries were also in the high-income bracket, they would face additional tax liability of 35 percent federal and 10 percent California when the money is withdrawn from a traditional IRA.
Part of the Consolidated Omnibus Budget Reconciliation Act, or COBRA, passed in 1986 allowed workers who lost health benefits to choose to continue group health benefits provided by their health plan for limited periods of time.
The subsidy has been delivered to laid-off workers through their employers.
Since March of 2009 with the recession increasing the number of those out of work, the federal government has been subsidizing 65 percent of COBRA costs for laid-off employees.
That benefit expired June 1, and the new tax bill Senate Finance Committee Chairman Max Baucus, D-Montana, introduced on June 16 does not include an extension of federal COBRA premium subsidies.
Industry experts wonder how much of an impact the elimination of the subsidy will have.
“A lot of the people I come across are going on spouse's insurance or are just going without insurance altogether. Even paying 35 percent is too much for the unemployed,” said Victor McKnight with Sitzmann Morris & Lavis in Santa Rosa.
“We also need to ask if the layoffs are slowing,” he said. “It appears that they are, but rehiring is slowing too.”
Linae Calkovsky, who joined Moss Adams in 2001, is leaving her position as sales and marketing coordinator. On July 1, she will join her husband to expand their growing international vintage camera and lenses business.