Roth IRA Conversion

Seriously consider a Roth IRA conversion in 2010 as part of your retirement income planning. There are several advantages - including no need to pay the income taxes immediately and no income level restrictions on converting to a Roth IRA. The Roth IRA conversion has two basic rules. First, you have to have an adjusted gross income of less than a specified amount. And, second, you have to pay income tax on the amount you convert to a Roth IRA from funds that were tax deductible when you deposited them into a 401K or traditional IRA.

The rules for contributions for most other retirement savings options allow you to deduct those contributions from your earned income and therefore pay no income tax on them until the money is withdrawn in retirement. Essentially, it allows you to defer paying the taxes until you being to withdraw.

Those savings options also require that you begin taking withdrawals when you reach age 70 1/2.

The rules for contributions to a Roth IRA are that you put the money into the plan 'after tax', so you don't get the deduction from your earned income and resulting income tax. However, when you begin to take the money out of the Roth IRA, it is all tax free.

Another benefit is that there is no defined age when you must begin taking withdrawals. So if you don't need the money, it can continue to grow until such time that you decide you want to withdraw some money.

The 2010 Bonus Year

In 2010, the income limits for converting to a Roth IRA are eliminated. However, income levels for contributions will continue to apply. In addition, the income tax payment required as part of the conversion process can be spread out over two years, 2011 and 2012.

Remember that the taxes for the conversion will need to be paid and are best paid with funds outside the money currently in your transitional IRA or 401K.

If you use money currently in your traditional IRA to pay the taxes, you will diminish the benefits of doing the Roth IRA conversion.

The younger you are the more beneficial the conversion will be. But those who are older should still check into it.

If you expect to be in a higher income tax bracket in retirement you need to check into this conversion option.

It is best to consider this conversion if you don't see needing the money for at least 5 years.

You may want to take advantage of paying income taxes now rather than later. Especially if you see the income tax rate increasing in the future.

It is possible to do a partial Roth IRA conversion. So, you can determine what would work best for you.

This rule only applies for the 'conversion' from a traditional IRA or other qualifying retirement plan to the Roth IRA. With that in mind, now might be the time for you to start contributing to a Roth IRA also, as long as you meet the income qualifications for contributions.

Before deciding to take advantage of this opportunity, it is highly recommended that you seek the professional advice of a financial advisor or tax accountant.

There are also very critical time constraints that must be met to complete the transfer process. You are given 60 days to complete the conversion, but I can tell you from experience that 60 days go by very quickly when you wait for others to make this process happen for you.

You will need to stay on top the process and follow-up with the people doing it so the deadlines are not missed. If the deadlines are missed then there are penalties to be paid.

Now is a good time to start planning for this 2010 opportunity.

Things to Consider
When Evaluating a Roth IRA Conversion

Three pieces of information are needed when preparing to see your financial adviser or tax accountant regarding converting to a Roth IRA.

You will need to determine the taxable (pre tax contributions) versus non-taxable (after tax contributions) portions of your current 401K or traditional IRA accounts, and your current and anticipated tax rates. Your plan administrator should be able to give you the pre tax and after tax split of your retirement accounts. You tax accountant can help with the tax rates.

Here's a Word of Caution: According to the front page article in the Milwaukee Wisconsin Journal Sentinel, on Sunday, December 6, 2009, please be aware that if your state has not adopted the new federal tax rules, you may end up paying penalties to the state on the initial conversion and for every year thereafter. The state of Wisconsin may be the only state that has not lined up with the new federal tax rules. But to be sure, check with your accountant before you do a transfer to ensure you don't invoke penalties.

You may be interested in reviewing this free guide to a self directed Roth IRA.

The timing may never be better for you to consider the Roth IRA conversion.


The information provided on this website is for informative purposes only. It is recommended that you seek advice for your specific situation from a Certified Financial Planner and Certified Tax Accountant.

Return from Roth IRA Conversion to retirement income.

Return from Roth IRA Conversion to planning for retirement.