I recently read an article in the Wall Street Journal that said 80% of people were not aware of the upcoming legislation changes that will create a significant opportunity for some people to save on taxes.

I wanted to make sure that my clients were aware of this opportunity, so if it is appropriate for them, they will be able to take action. Whether you have heard bits and pieces of this opportunity or it is new to you now, this will help you understand this change.

Under the Tax Increase Prevention and Reconciliation Act , (TIPRA), all taxpayers will be able to convert all or some of their traditional IRAs or old 401ks into Roth IRAs, regardless of income. This will allow people to convert accounts that will be taxable upon distribution down the road (conceivably when tax rates are higher) to accounts that will be taxable now, but then will grow tax deferred and will be completely tax free down the road when you take distributions.

There are several reasons why this is such a great opportunity for some people and I have outlined those below.

If you would like to explore this opportunity please contact me anytime at 651-647-4935 to discuss if it is appropriate for you. Many will be taking advantage of this legislative change and you should definitely consider it as a viable financial planning option to save money on taxes.

1. Potentially Higher Tax Rates In The Future

All of those stimulus package initiatives and government bailouts are going to cost money. As a result, today’s tax rates might be the lowest you’ll see for the rest of your life. The consensus is that we may see taxes rise significantly – but no one knows how much.

If you are considering converting to a Roth IRA, you should get a move on, especially if you’re victim of a wage cut or layoff and are in the 10% or 15% tax bracket. In a year or two, you may be in a higher tax bracket because of a new job or salary increase, so it’s best to take advantage of the low tax rates now.

2. Ability to spread the conversion tax hit over two years.

Another new perk coming next year: deferred taxes. Those who convert to a Roth IRA in 2010 can spread their tax liability out across 2011 and 2012, thereby reducing some of the immediate tax hit. They’ll pay half the income they convert in 2011 and the other half in 2012 at whatever tax bracket they’re in during those years.

3. Shrinking retirement portfolios

Seeing your traditional IRA or 401(k) shrink by 30% in a year isn’t much to smile about, but if you convert these accounts to a Roth IRA now, you will pay less in taxes. When you convert part of your IRA or 401(k) balances to a Roth IRA, you pay taxes on the amount being converted. Because account balances have shrunk, your taxable balance is likely to be considerably lower today than it was when the market was stronger. In effect, this is an opportunity to use the market downturn to your advantage.

4. Estate-Planning Benefits

For those concerned about reaching their 80s or 90s with enough cash to leave to their children, the Roth IRA offers some generous estate-planning benefits.

When a traditional IRA or 401(k) is passed on to a beneficiary, the beneficiary has to pay taxes on whatever is left in that nest egg based on their own tax bracket – not the tax bracket of the original account holder. With a Roth IRA, the beneficiary acquires the account without having to pay taxes on the cash that’s left. (The original holder had already paid taxes on the contributions.)

The Roth IRA also doesn’t require minimum withdrawals, so you could leave the entire nest egg untouched for a beneficiary. Typically, traditional IRAs require minimum withdrawals by age 70 1/2.

Jeff Bergerson, Financial & Tax Advisor

1452 Concordia Avenue

St. Paul, MN 55104

651-647-4935