2010 Roth IRA
Conversion Opportunities:
June 25, 2009 12:01 p.m. PST
In 2010 investors will have a one time opportunity to convert their regular IRAs to Roth IRAs regardless of their income. This window of opportunity will last only one year. The income ceiling for conversions ($100,000 Adjusted Gross Income) will be temporarily suspended during 2010.
Should you make the conversion?
Many tax advisers typically recommend that you delay paying taxes for as long as possible. However, this may be an important exception. Paying more in taxes in 2010 may save you a great deal of money in the long run. We believe you should consider making the conversion if the following circumstances apply to you:
- You can pay the tax on the conversion out of money you have in the bank. (The amount of the conversion will be added to your taxable income and you will pay tax on it at your marginal tax rate.)
- You don’t plan on taking distributions from your Roth IRA for at least 20 years. (The longer you wait to tap the IRA, the more advantageous the conversion strategy becomes.)
There are a variety of ways to make the calculation as to the long-term advantage in making the conversion. Since the IRA amount you convert will grow tax free, the longer you wait to tap the Roth IRA the more tax-free growth you will accumulate. Remember that unlike a regular IRA, Roth IRA distributions are not taxed.
Converting to a Roth IRA also simplifies investment and estate planning. With a conventional IRA you must begin required minimum distributions at age 70 ½, whereas with a Roth IRA there are no required minimum distributions at any age. Also, if you are planning to leave your IRA to your children, the rules governing the distribution of inherited Roth IRAs are much simpler than for regular IRAs.
In the long term we believe that tax rates will be higher and that it makes sense to pay taxes while they are lower (by making the conversion to a Roth IRA). Imagine the relief of being able to withdraw money from a Roth IRA without paying any taxes at all!
Taxes on the conversion can be paid either in one year (2011) or spread out over two years (2011and 2012). You may want to make a partial conversion that will allow you to stay in your current tax bracket. We recommend working with your tax advisor to determine how much you can convert to a Roth IRA in 2010 without pushing your income into a higher tax bracket over the next two year.
This is a once in a lifetime opportunity that you should carefully consider. Please let us know if you have any questions.
Austin Gallaher
Staff Writer at Wealth Analytics
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