2010 ROTH IRA Conversion

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Historically, individual taxpayers were not permitted to have a Roth IRA retirement account if they had an adjusted gross income of over $100,000.  For those who were over the Roth IRA threshold, only traditional IRA’s and 401k plans were available.  Starting in 2010, the IRS eliminated the $100,000 threshold, allowing anyone to convert an existing IRA or 401k into a Roth IRA.  There are still restrictions on making annual contributions to a Roth IRA, contributions for 2009 and 2010, but those limitations have been substantially increased.

Tax Implications of Converting to a Roth IRA

In order to ease the burden associated with converting an existing traditional IRA or 401k retirement plan to a Roth IRA, the IRS has made special provisions for those taxpayers who take advantage of the conversion option in 2010.  Individuals converting to a Roth IRA will have to pay additional Income Tax on the amount converted.  For 2010 conversions only, the IRS will allow individuals to split the converted amount and report 50% on their 2011 and 50% on their 2012 tax returns.  The ability to split tax payments on conversions is available only for conversions that take place in 2010.

How is a Roth IRA Different than a Traditional IRA?

A Roth IRA differs from a Traditional IRA in the treatment of contributions and distributions. Roth IRA contributions are made on an after-tax basis; traditional IRA's contributions are made with pre-tax dollars.  In both cases, investments grow while the earnings are Tax Deferred.  The major difference between the two types of IRA’s with respect to distribution is that individuals who have a Roth IRA will enjoy tax-free distributions, while those with traditional IRA’s will be taxed on the distributions.

Another significant difference between the two IRA's is the ability to not take distributions form a Roth IRA vs. the requirement to take distributions after reaching 70 1/2 from a traditional IRA.  This may be important to those who do not need to live on their IRA assets in retirement.

Why Convert to a Roth IRA Now?

2010 conversions to Roth IRA’s are encouraged because of the availability of the provision that lets individuals pay the income tax associated with the distribution over two years (2011 and 2012).  Also, for individuals who anticipate being in a higher Tax Bracket in the future, converting to a Roth IRA while in your 2010 tax bracket may provide substantial savings when compared to your tax bracket in 5 to 10 years.  A number of other advantages to wealthier taxpayers who wish to engage in sophisticated estate planning may be obtained as a result of a conversion.

Seeking professional legal help from a tax attorney is a must if you wish to maximize your benefits from a retirement plan.  A lawyer with experience in retirement plans can be very helpful in determining if a conversion to a Roth IRA makes sense for you.

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