The Roth IRA Conversion…It's About Time

In 2010, everyone can do a Roth IRA Conversion ("Conversion").  What is a Roth Conversion?  It's when you take money out of your IRA, tax it, and convert it into a Roth IRA.

There was an income limit as to who was eligible to do a conversion.  Previously, only taxpayers with Modified Adjusted Gross Income ("AGI") of less than $100,000 were eligible.  This restriction has been removed for 2010.

There is an extra tax benefit for conversions done in 2010.  You have the option to spread the income one half into 2011 and the other half into 2012.

What's the benefit to a Roth IRA?  If the account is open for at least five years and the taxpayer is over age 59½, all distributions are income tax free.

What is the downside to making a conversion?

  • The income tax needs to be paid on the amount distributed from the IRA account.  No tax is due on any IRA contributions that were nondeductible.
  • If there is a distribution from the IRA that is not converted, in addition to the income tax, there is a federal income tax penalty of 10% for taxpayers under age 59½.

Who should consider a conversion?

  • Someone who has the cash available from another source to pay the tax so that the entire IRA can be converted.
  • Someone who expects to be in a higher tax bracket in retirement.
  • Someone who doesn't expect to "need" their IRA to live on and wants to transfer wealth to the next generation.
  • A younger taxpayer that will have many years of tax-free growth in their Roth IRA.

Separate from doing a conversion, taxpayers may also be eligible to contribute to a Roth IRA annually.  For 2009, the income limit as to who is eligible to make contributions to a Roth IRA based on your AGI as follows:

          Single:  $105,000 – $120,000
          Married Filing Joint:   $166,000 – $176,000

ACTION Item:  If you have the cash to pay the income tax, see if a Roth Conversion makes sense for you.  If it does, it could be a home run!

Thomas F. Scanlon, CPA, CFP®

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