A Publication of WTVP

Beginning in 2010, many high-income individuals will be allowed to convert their traditional IRAs to Roth IRAs. On January 1, 2010, the income limits for individuals converting to Roth IRAs will be eliminated. This change happens at a time when many IRA accounts have declined in value and tax rates may be relatively low.

Types of IRA Accounts
The two most common types of individual retirement accounts are traditional IRAs and Roth IRAs. They are similar in that both allow for tax-deferred growth inside the account. The difference between the two is how the account is taxed at the time of the contribution and withdrawal. With a traditional IRA, your contributions are generally tax-deductible when they go into the account, but you will be taxed when you withdraw the money at retirement. With a Roth IRA, you get no tax deduction when the contributions are made to the account, but the withdrawals from the account are tax-free at retirement, as long as you have attained age 59.5 and satisfied a five-year holding requirement.

In 2009 and prior years, individuals were not allowed to convert their traditional IRAs to Roth IRAs if their adjusted gross income exceeded $100,000 or if the filing status on their tax returns were “married filing separate,” unless they lived apart from their spouses for the entire year. As indicated above, the income limit has been removed beginning January 1, 2010. In addition, the rule against conversion by those with a filing status of “married filing separate” no longer applies. This has opened the opportunity for many high-income individuals to reposition all or a portion of their individual retirement accounts in Roth IRAs.

Tax Consequences of a Conversion to a Roth IRA
Conversion from a traditional IRA to a Roth IRA is a taxable event. You will be taxed on any amount that would have been taxable had you taken a distribution directly from the traditional IRA. However, the 10-percent early withdrawal tax penalty does not apply to the amounts converted to a Roth IRA. In addition, special tax rules apply for conversions occurring in 2010. The taxable portion of the 2010 conversion is included in your taxable income in equal installments in 2011 and 2012, unless you elect otherwise. Accordingly, unless you elect differently, none of the conversion amount will be taxed in 2010. Instead, half will be taxed in 2011, and the other half in 2012.

Items to Consider for Roth Conversion
The decision to convert a traditional IRA to a Roth IRA is dependent on many factors and is unique to each individual’s situation. Some potential benefits to a Roth IRA conversion are as follows:

Conversions from Eligible Retirement Plans to Roth IRAs
Beginning January 1, 2008, distributions from tax-qualified plans such as 401(k), profit sharing, money purchase, 403(b) and 457 plans can be rolled directly into a Roth IRA. These rollovers are subject to the same restrictions that apply to conversions from a traditional IRA to a Roth IRA as discussed above.

The changes that are taking place with respect to Roth IRA conversions provide a valuable retirement planning opportunity. However, you need to consider many factors as they relate to your personal situation to determine if a Roth IRA conversion is the right choice for you. iBi