John D. McKinnon for the Wall St Journal writes: New statistics show that higher-income people jumped at the chance to convert traditional IRAs to Roth-type IRAs following a recent law change by Congress – a possible sign of fear about rising U.S. tax rates down the road.
New statistics from the Internal Revenue Service show that in 2010, the amount converted from traditional IRAs to Roth IRAs rocketed upward by more than 800%, to $64.8 billion. That even exceeded the amount contributed to Roth IRAs, the IRS said in its quarterly statistical bulletin. (IRAs, short for Individual Retirement Arrangements, were created by Congress to encourage people to save money for retirement on a tax-advantaged basis.)
About 10% of people with incomes exceeding $1 million who had traditional IRAs converted, according to the new report.
Unlike traditionally IRAs, money from Roth IRAs generally isn’t taxed when it’s distributed. Many people who convert traditional IRAs to Roth IRAs worried that they would eventually face a big tax bite.
Prior to 2010, only people making less than $100,000 could convert a traditional IRA to a Roth IRA. Congress passed a law in 2006 that eliminated that income limit, starting in 2010.
Of course, there’s often a price for congressional generosity. Roth conversions typically require a hefty upfront tax payment. Analysts in 2006 expected the law change to raise about $6 billion for the government over the next decade.
The findings could provide further fuel for the debate over the current array of tax breaks for retirement savings. Some liberal critics say the current system is too generous to wealthy people who would save anyway.
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