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Measure 66 may tax your retirement savings

January 12, 2010

By Dr. Eric Fruits

The business press and investment advisers have declared this year to be the Year of the Roth IRA.

Roth IRA: “One of the best deals in retirement planning”.  With a Roth IRA, virtually all income growth and withdrawals are tax-free.  Because retirees don’t pay taxes on their withdrawals, the Roth IRA has been called one of the best deals in retirement planning.

With the turn of the New Year, the income limits that have prevented many individuals from converting a traditional IRA or employer-sponsored retirement plan to a Roth have been eliminated.   The loosening of the rules is particularly well-timed for a period when workers are losing their jobs and are no longer employed with the company that holds their retirement account.

There is a catch, though.  If you convert your traditional IRA or employer-sponsored retirement plan to a Roth IRA, you must pay taxes on the converted money as if it was earned income.

Even so, the Federal government has made this part less painful in 2010. You can report the amount you convert in 2010 on your tax return for that year. Or, you can spread the amount converted equally across your 2011 and 2012 tax returns, paying any resulting tax in those years. For example, if you convert $50,000 next year and choose not to declare the conversion on your 2010 return, you must declare $25,000 on your tax return for 2011 and $25,000 on you return for 2012. The two-year option is a one-time offer for 2010 conversions.

Many Roth IRA conversions may be subject to Measure 66’s higher rates

While most of the attention on Measure 66 has been directed at the impacts on entrepreneurs and investors, the increased taxes will also affect the thousands of middle class households that are considering a Roth IRA conversion.  Oregon’s Measure 66 will make such conversions especially painful because some or all of the money that investors have saved over the years may be subject to Measure 66’s highest tax rates.

Measure 66 imposes two new tax brackets affecting 2010 income:

A new marginal tax rate of 10.8 percent would be levied for taxable income between $250,000 and $500,000 for joint filers and $125,000 and $250,000 for single filers.
A new 11 percent marginal tax bracket would be created for taxable income above $500,000 for joint filers and $250,000 for single filers.
More than 40 percent of all families in the U.S. participate in some type of employment-based retirement plan.  These plans include defined benefit (pension) plans and defined contribution plans such as a 401(k) or 403(b).  In addition, approximately 1 in 3 families has an IRA or Keogh account.

Among those with either a defined contribution plan or an IRA/Keogh account, the average account balance is $148,440.  For those age 55 and older, the average account balance is more than $250,000.  More than 1 in 10 families have account balances in excess of $500,000.

A family converting $300,000 in retirement funds would have to come up with another $900 in Oregon taxes if subject to Measure 66.  A family converting a $600,000 retirement account would have to find another $6,500 in cash to pay additional Measure 66 taxes.

As an unintended consequence, Measure 66 may deny many Oregonians the chance to participate in a once-in-a-lifetime opportunity to get into what has been called one of the best deals in retirement planning.

The Wall Street Journal provides a summary of the provisions of the Roth IRA conversion program.  The Employee Benefit Research Institute provides statistics on retirement plans and balances in the plans.

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Discuss this article

Marvin McConoughey January 12, 2010

This is very important information for Oregonians who plan to convert large amounts of money into a Roth IRA. These sums often far exceed the taxpayer’s normal income and do not typify his normal level of annual income. The law of unintended consequences strikes once again. Vote no on 66. For younger persons, a vote for 66 may well be a vote for lower retirement income for your parents.

Severica January 12, 2010

Mortgage Accelerator – Forbidden Retirement Investment Advice For 2010

Some investment advice is considered universal and timeless.

But with the markets having bottomed out in the recent financial crisis, individuals approaching retirement age in the next 3 to 5 years have to consider their options and the viability of staying the course.

Double J January 12, 2010

Who says you need to convert your IRA over to a Roth IRA. The one year waiver was done so that tax payers can convert their IRA at lower average tax rates, the average low dollar rollover will be at the 25% Federal Income tax rate of 25%.

The example the good doctor uses would produce a rollover from an IRA over to a Roth IRA would result in 34% federal tax on the traditional IRA funds.

Odds of this happening, well they don’t exsist. It’s just like all of the companies that will be leaving for Washington where the B & O tax is HIGHER than the NEW Oregon Business Income Tax.

It also won’t happen. What we are really voting on is does business run this state or do the people?

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