Roth IRA Conversion May Generate Long-Term Wealth for Heirs Says CornerCap Investment Counsel

New tax law has inter-generational impact

Jan 26, 2010, 10:00 ET from CornerCap Investment Counsel

ATLANTA, Jan. 26 /PRNewswire/ -- Changes in the rules governing Roth IRAs may provide two-to-three times the wealth generation as traditional IRAs, under the right circumstances, according to CornerCap Investment Counsel.

This could mean greater and disproportionate impact for heirs when compared with more standard taxable alternatives. Visit www.cornercap.com/whitepapers.shtml for a copy of the report.

CornerCap is recommending that investors who have the liquidity and long-term estate planning opportunities consider the inter-generational impact of a Roth conversion, in place of the impact on their own retirement.

This unusual opportunity results from provisions in the Tax Increase Protection Reconciliation Act of 2005 (TIPRA) that take effect this year, which allow any individual to convert a traditional IRA to a Roth IRA regardless of income level. There is a tax associated with converting, but the law offers the option of paying the conversion tax in 2010 or to equally spread the income recognition and tax payment over the 2011 and 2012 tax years.

So when does converting to a Roth make sense? Since the amount being converted into a Roth is typically treated as ordinary income for the year the conversion takes place, much of the decision revolves around paying taxes now rather than later.

"A traditional IRA grows tax-deferred until mandatory taxable distributions commence at age 70, whereas a Roth IRA grows tax-free," says Douglas Dougherty, CFA and Vice President of CornerCap Investment Counsel. "Given one's current tax bracket, age, and life expectancy, it is possible to receive greater economic benefit over one's lifetime by converting and paying the tax today."

But CornerCap took the analysis one step further to evaluate who benefits the most from the amendment to the existing tax code. Using a proprietary model that compares a Roth investment (after taxes are paid) with alternative investment strategies (including a traditional IRA), CornerCap found that long-term wealth generation via a Roth can be significantly better -- "by perhaps an order of magnitude of 2X-3X," says Dougherty.

Dougherty explains that the conversion isn't for everyone. Those who will reap the biggest benefits are those who can fund their retirement lifestyle without their IRA assets and still pay the conversion tax and who want to maximize potential wealth for their heirs. For those who fit in that category, a conversion may be a unique wealth generating opportunity for their families.

About CornerCap Investment Counsel

CornerCap is an independent investment counseling and management firm focused on providing quality investment decisions and the highest level of client service.  The firm has been serving clients since 1989, providing investment management services to private clients, institutions, foundations, and endowments.  

CornerCap serves clients around the globe from its offices in Atlanta, Ga. and Charlotte, N.C.  For more information call 404-870-0700 or visit www.cornercap.com .

SOURCE CornerCap Investment Counsel



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