Starting January 1, 2010, traditional IRA owners will have the opportunity to convert a traditional IRA to a Roth IRA without being limited by the IRA owner’s income level. Prior to 2010, the IRS required taxpayers to have an AGI less than $100,000 to take advantage of a roll-over of IRA assets to a Roth. This income limitation will no longer be in place as of January 1st.
Roth Benefits
Roth IRAs are funded with after-tax dollars and future retirement withdrawals are not subject to income tax. This is in contrast to a traditional IRA in which deposits are tax-free but distributions are taxed at the taxpayer’s income tax rate. So, the Roth IRA can be a powerful retirement and estate planning tool, since the account will grow tax free with tax-free distributions during retirement.
Conversion Considerations
But, not everyone should rush to convert. Income taxes must be paid on traditional IRA funds that are converted to a Roth IRA. This cost must be weighed against the benefits of tax-free growth and tax-free distributions in the future.
The decision to convert is also not an all or nothing proposition. Current law allows all IRA owners to convert beginning in 2010, but conversions may occur in later years as well. Converting a portion of your traditional IRA over time will spread out the tax consequences, but also will dilute the benefits of the conversion.
The Tip
Talk with your financial advisor about the benefits of a Roth roll-over and how they apply to your specific situation. Many factors play into the decision of whether to convert, so it pays to take some time now to determine if your situation warrants a conversion. You may be able to save thousands of dollars in tax later by taking this one step.
