Starting in 2010, the existing $100,000 income test for converting a
traditional IRA to a Roth IRA will no longer apply. Conversions that
occur in 2010 will be able to have half of the taxable converted amount taxed in
2011 and the other half taxed in 2012. (On May 17, 2006, President Bush signed the Tax Increase
Prevention and Reconciliation Act of 2005 into law. This tax bill
included a provision dealing with conversions of traditional IRAs to Roth IRAs.)
Since Roth conversions increase tax revenues, it seems unlikely that the
previous income ceiling will be reinstated anytime soon.
On August 17, 2006, President Bush signed into law the
Pension Protection Act of 2006. This law made permanent increased
contribution limits to IRAs (including Roth IRAs) that would otherwise have
expired after 2010. It also made permanent the
Roth 401(k), which
would otherwise not have been available after 2010.
Roth IRA Advantages- Income tax-free growth potential
- No mandatory withdrawals at age 70 1/2
- Contributions allowed after age 70 1/2 (provided there is no earned income)
- Potential income tax-free qualified distributions to you
- Income tax-free distributions to beneficiaries
- Possible estate tax benefits
- Possible reduced taxation of Social Security benefits
What is a Roth IRA Conversion?- A Roth IRA Conversion is a conversion of any Traditional IRA, SEP IRA or any other qualified plan to a Roth IRA
Who is eligible for conversion?- In 2009, people who have a modified adjusted gross income that does not exceed $100,000 are eligible, provided they are not married filing separatly.
- In 2010, the $100,000 threshold for Roth IRA conversions will be lifted and anyone, regardless of income level or filing status, can convert to a Roth IRA.
When to consider a Roth IRA conversion?- If you anticipate your tax bracket being lower now than in the future
- When your assets are down in value
- If you want to pay taxes now to provide a potentially income tax-free benefit to beneficiaries
- If you want to reduce taxes due on your Social Security benefits
Things to keep in mind- A partial conversion is allowed
- Having excess funds available to pay the taxes on the assets converted to a Roth IRA is advantageous
- For conversions in 2010, tax payers pay half of the tax liability in 2011 and the other half in 2012
