Roth IRA Conversion More Attractive in 2010
Convert From Traditional IRA to Roth Regardless of Income
Aug 8, 2009
Prior to 2010, anyone with an adjusted gross income over $100,000 is ineligible to convert traditional IRA assets to a Roth IRA. Thanks to former president George W. Bush, who signed into law the Tax Increase Prevention and Reconciliation Act (TIPRA) in 2006, anyone can convert from a traditional IRA to a Roth IRA in 2010, even if their adjusted gross income is more than $100,000. Attorney Robert E. Ward discusses the essential provisions of TIPRA in his article, An Overview Of The Tax Increase Prevention And Reconciliation Act of 2005, published in the Summer 2006 edition of The Practical Tax Lawyer.
Delay Tax Payments
Converting from a traditional IRA to a Roth IRA does require the IRA owner to pay current income taxes on the gains realized from the conversion. Even though assets are passing from one type of IRA directly to another IRA, the IRS treats this conversion as though it were a taxable distribution.
Ordinarily, this tax is due for the year in which the owner makes the IRA conversion. However, the 2006 tax law change also allows those who convert a traditional IRA in 2010 to spread the tax burden across two years, paying them in 2011 and 2012. Delaying the tax payment due on the conversion amount is an added bonus to the existing tax advantages built into a Roth IRA.
Since its inception, an attractive feature of the Roth IRA is the availability of tax-free withdrawals at retirement. The trade-off for this tax-free income is the elimination of tax deductions for contributions made to a Roth IRA. Whereas a traditional IRA can be funded with pre-tax dollars, via tax deductions for contributions, future withdrawals from the traditional IRA are potentially taxable.
Advantages of Converting to a Roth IRA in 2010
Previously, the decision to convert from traditional IRA to Roth IRA was a complex process requiring analysis of one’s age, income, tax bracket, and number of years to retirement. The 2010 Roth conversion window makes this decision less complicated, since it removes the income restriction. In most cases, the younger the age of the IRA owner, the more advantageous the conversion will be for him or her. With more years available until retirement, these investors have more time to recover from the immediate tax hit.
Traditional IRA investors have been hesitant in the past to convert to a Roth IRA. The disdain of paying taxes on the conversion outweighed the opportunity for future tax-free income. However, recent stock market declines and the potential for future tax rate increases are now attractive reasons to consider making this conversion. Many investments declined significantly during 2008, reducing the amount subject to taxes if these traditional IRA assets are converted to Roth assets.
Roth IRA Limits
Taking advantage of the 2010 IRA conversion opportunity does not necessarily qualify Roth IRA owners to make future contributions to a Roth IRA. The income limitations for Roth contributions will still apply. For tax year 2009, the adjusted gross income limit for single tax filers is $120,000. For married-filing-jointly taxpayers, this income limit is $176,000. The IRS disallows Roth IRA contributions by tax filers earning more than these amounts.
Before making a decision to switch from a traditional IRA to a Roth IRA, most investors should consult with a financial planner or a tax advisor, just to be certain of all the requirements and conditions surrounding their individual situation. IRS Publication 590, Individual Retirement Arrangements (IRAs), also discusses the details and requirements for traditional and Roth IRAs, as well as taxes due for conversions.
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