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Roth IRA Conversion

In this newsletter we wanted to highlight a hot item for your consideration - a special Roth IRA conversion opportunity in 2010. The opportunity became available in May of 2006 when President Bush signed a $70 billion tax cut provision that changed the eligibility rules for Roth IRA conversions. Because the new law will take effect in 2010 we recommend starting your review process during this tax planning season.

Author: Jim Bailey
SVP Wealth Management
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When the Roth IRA was fist introduced, many investors quickly switched their retirement funding strategy from traditional IRAs to Roth IRAs. Since many higher income individuals were already making after tax contributions to an IRA, the switch to a Roth made a lot of sense.

In addition to not paying federal taxes on the growth portion of their traditional IRA contributions, investors could now make an after tax contribution to a Roth IRA and not pay any taxes on their withdrawals in retirement. While the benefits of the Roth were clear going forward, many of those planning for their retirement years didn’t think twice about managing two accounts – one for their traditional IRAs and a second one for their Roth accounts. But what if they decided to they wanted to convert their traditional IRA to a Roth IRA?

Starting in 2010 taxpayers with higher gross income will be incented to convert a traditional IRA to a Roth IRA. This change applies for 2010 only and the income taxes due on this conversion can be spread over two years. So the 2010 conversion amount may be included as taxable income in 2011 and 2012, helping to ease the tax liability. Conversions after 2010 do not get the same benefit and depending on your adjusted gross income you may be precluded from future Roth conversions.

While it might be very exciting for some individuals to learn that they can use the 2010 tax law to transfer an existing IRA to a Roth IRA, you should consult with your tax advisor to insure the viability and prudence of a Roth conversion is in you best interest.