Beginning in 2010, an IRA conversion to a Roth IRA can be done regardless of income level.The previous AGI threshold of $100,000 will be eliminated. Additionally, married filing separate taxpayers will be able to make the conversion to a Roth, which has previously been an unavailable option. These new rules will pose tax planning challenges and opportunities for the next few years.
There are advantages to converting a Traditional IRA to a Roth IRA. For one, unlike Traditional IRAs, qualified distributions from Roths are tax-free-including earnings. Additionally, the required minimum distribution rules do not apply to Roth
IRAs.
Those who would benefit the most from converting their IRA into a Roth IRA include:
● Taxpayers with a number of years before
retirement (to recoup the tax paid on conversion)
● Those who anticipate being in a higher tax
bracket in future years.
● Those who can afford to pay the tax on the conversion without using cash from the retirement account.
Now for the fun part: Any income from the conversion to a Roth IRA in 2010 is automatically deferred. Half of it will be reported in 2011 and the other half will be reported in 2012. An election can be made to include the entire amount on your 2010 taxes. You don’t want to overlook that option—especially if it is clear that you will be in a higher tax bracket for 2011 or 2012.