Roth IRA Conversions - New Changes for 2010!

Prior to 2010, an individual could convert their Traditional IRA to a Roth IRA but only if their modified AGI did not exceed $100,0000. Now, as a result of a provision stuck deep inside a bill signed into law by George Bush back in May of 2006, ANYONE can convert their Traditional IRA to a Roth IRA regardless of their income. Roth conversion planning can provide an excellent opportunity from both an estate and income tax perspective and is worth considering by anyone with a pre-tax retirement account.

To convert or not often comes down to a numbers game; if you think tax rates are likely to go up in retirement then you should convert; if you think tax rates will go down, then you should not convert. While this is generally a good rule of thumb, there are other benefits to consider when deciding whether or not to convert. For example, converting to a Roth allows an individual to grow more wealth income tax free, provided that the individual can pay the tax on conversion with outside funds. Additionally, Roth IRAs are not subject to the required minimum distribution (RMD) rules, so the account will continue to grow tax-free during the lifetime of both spouses. At the death of the second spouse, the Roth IRA would then be subject to the RMD rules, but it would be based on the life expectancy of the beneficiary, which would maximize the stretch build-up period within the account. Even if you think that tax rates are likely to remain about the same in retirement and you do not expect to need the IRA as a major source of income to live on, the Roth conversion becomes practically a no-brainer.

Still not convinced? Well, converting is not an all or nothing deal. If you are at all uncertain or just want to hedge against future tax rates, you can choose to convert some of your Traditional IRA rather than all of it. And if you convert but then change your mind or your circumstances change, you are allowed to re-characterize any portion of the converted amount by the extended filing deadline of the return year in which you convert. You could even convert and set up several Roth IRA accounts by asset class and then re-characterize any accounts that have gone down in value back to a Traditional IRA.

There are many other nuances and strategies that you can implement when considering whether or not to convert some or all of your retirement accounts to a Roth IRA. Make sure as tax filing season approaches that you talk to your accountant and/or financial advisor to see how you can take advantage of the new law. Also, please feel to shoot me an email if you have any questions, chrisbenner@hotmail.com.