Article:
Congress Extends Capital Gains Rate—Expands ROTH IRA
by Paul H. Roskoph
July 1, 2006
After much haggling and posturing, the Bush Administration has succeeded in extending the 15% capital gain rate and the 15% tax rate for qualified dividends. Unfortunately, no progress was made on resolving the modification to the estate tax exemption or the repeal of the estate tax.
The bad news is that the dreaded "kiddie-tax" which imposes a tax rate on children for unearned income (interest in dividends) equal to the maximum rate applicable to their parents, continues. Even worse, the kiddie-tax is extended from age 14 to 18. This is an unfortunate occurrence and one that seemingly did not involve a significant amount of taxes to the government.
The 2006 tax bill also reintroduced the Roth IRA in an expanded manner.
By way of brief summary, a Roth IRA allows a non-deductible contribution to an IRA account that will allow internal earnings and distributions to beneficiaries (including the original creator of the account) to be tax-free as opposed to tax deferred. Withdrawals from the Roth IRA are not subject to income tax. This can prove to be a meaningful benefit to many taxpayers. In the past, Roth IRAs were not available to taxpayers whose adjusted annual income exceeded $100,000. The new law eliminates this dollar limitation. It also permits a conversion of the traditional IRA account to a Roth IRA. This conversion, however, is subject to income tax at the time of conversion. Thus, the government is trying to accelerate the receipt of income tax on the trillions of dollars held in retirement account. They have crunched the numbers and know what they are doing. On the other hand, the law does provide for the calculation and payment of this accelerated tax over a period of three years.
For the right opportunities, when retirement income is low and the tax rate is low, the conversion of a traditional IRA account to a Roth IRA may be worth investigating.
If you would like further information on these Roth IRA strategies or other subjects, please contact our office by email or at (650) 470-5300.
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