roth conversion for laid off employee
If a client is laid off in 2009 and receiving unemployment benefits, can he convert his traditional IRAs to Roth IRAs in 2010? If so, it would seem prudent since his income would be the lowest in years. Is this correct?
Permalink Submitted by Alan Spross on Mon, 2009-02-16 22:23
A client can convert to a Roth anytime he is eligible. 2009 is the last year that income limits of 100,000 apply. I do not know if the Stimulus Bill provision of not taxing unemployment benefits means that these benefits are not in AGI or just taxed at a -0- rate, but that could affect falling under the 100,000 limit.
One caveat here is that the taxes for the conversion should generally be paid out of non retirement account assets. And if the client will be out of work, he may need to preserve those assets for living expenses.
In general, except for those who have large pools of pre tax retirement assets, the financial meltdown would result in lower amounts being converted to Roth IRAs. That’s based on planned retirement assets falling more than tax rates are expected to rise over time. Since tax rates for upper income incomes are expected to rise faster than for lower incomes, Roth conversions may now be relatively more advisable at higher income and asset levels than before. Another way of putting this is that if the same asset level is used, there will be fewer taxpayers that current have secure incomes or assets than 18 months ago.