ROTH IRA CONVERSIONS IN 2010?

WHAT YOU NEED TO KNOW

1. WHAT IS A ROTH IRA CONVERSION?

A Roth conversion is a conversion of a traditional IRA or another similar retirement plan into a Roth IRA. Income taxes are assessed on the amount of pre-tax money you are converting.

WHAT IS A ROTH IRA? TRADITIONAL IRAs v. ROTH IRAs

A traditional IRA may be funded with pre-tax funds and a Roth IRA is funded with after tax funds. Growth and earnings in the traditional IRA will eventually be taxed along with the pre-tax contributions when the funds are withdrawn. On the other hand, since the funds contributed to the Roth IRA are after tax funds they will not be taxed upon withdrawal as long as certain conditions are met. The following is a quick break down of some of the key facts about both traditional and Roth IRAs:

TRADITIONAL IRAs

* Contributions are tax-deductible unless you are a current participant by a qualified employer-sponsored retirement plan like a 401(k). If you are a participant, you can contribute but, your eligibility to deduct contributions is based upon your income level.

* Limitations apply to the amount that can be contributed annually. Contributions for 2010 are limited to $5,000 or $6,000 for those who are age 50 or older.

* Distributions are taxed at the tax payer’s ordinary income tax rate for the year in which the distribution or withdrawal is made.

* A withdrawal penalty of 10% plus income tax may apply to any funds withdrawn prior to age 59 ½.

* Required Mandatory Distributions (RMDs). At age 70 ½ and beyond the IRS requires that certain amounts must be withdrawn.

* Distributions and withdrawals may cause Social Security benefits to be taxed or trigger other income-level tax penalties due to the inclusion of the funds withdrawn in the taxpayer’s income in the year.

ROTH IRAs

* Contributions are NOT tax deductible.

* You cannot contribute to a Roth IRA, if your income is greater than one hundred thousand dollars ($100,000.00)

* The same contribution limitations apply to Roth IRAs. Contributions for 2010 are limited to $5,000 or $6,000 for those who are age 50 or older.

* A withdrawal penalty of 10% applies to any funds withdrawn prior to age 59 ½.

* Appreciation and earnings are income tax free provided the account holder is at least age 59 ½ and the funds have been in the Roth for at least 5 years.

* Any amount of the fund contributed or converted that withdrawn after age 59 ½ will not be taxed.

* The accumulated growth and earnings for funds hold less than 5 years are taxed as ordinary income to the extent it is withdrawn.

* Funds converted to a Roth IRA are not subject to required minimum distribution (RMD) by the original owner or the original owner’s spouse, non-spouse beneficiaries must take the balance of a inherited Roth in minimum distributions based upon their life expectancy.

* Since distributions and withdrawals from a Roth IRAs are tax free they do not cause Social Security benefits to be taxed or trigger other income-level tax penalties.

3. WHY CONVERT IN 2010?

There are three key reasons why conversions in 2010 are different those conversions in any other year.
1. The income cap for converting a Roth has been lifted. In years prior to 2010, a taxpayer was not allowed convert to a Roth IRA if their Adjusted Gross Income (AGI) was in excess of $100,000.

2. For 2010 conversions only, you can elect to report the income on your 2010 return or split the income in your 2011 and 2012 returns. Taxpayers have the option to spread the income over two tax years, reporting half the conversion income in 2011 and the remaining half in 2012. Tax would not be due until 2012 and 2013. In years other than 2010, conversion amounts are reported on the tax return filed for the year of the conversion.

3. Taxpayers who act now may do so without any fear about consequences. As long as the income from the conversion is reported on the taxpayers 2010 tax return, they will retain the option to “reverse” the conversion before October 16, 2011 or until the following tax year whichever comes later.

4. IS CONVERTING RIGHT FOR YOU?

Conversion might be right for you

* If your fairly confident you’ll be in a higher tax bracket in retirement
* If the tax consequences of converting will be small.
* If you don’t have any Roth assets. A Roth will provide flexibility in managing your taxes when you retire.
* If you have plenty of other retirement resources and don’t need to take required minimum distributions.
* You want to share the benefits of the Roth to your heirs.

Conversions might NOT be right for you

* If you’re confident you’ll be in a lower tax bracket in retirement.
* If you have to sell assets of use part of the IRA to pay extra taxes.
* If you need to withdraw a converted account within five years or before you are 59 ½.
* If by converting you will be ineligible for certain tax benefits.
* If you intend to leave money to charity from your Roth IRA.

5. REQUIRED MINIMUM DISTRIBUTIONS FOR 2010

Converting to a Roth IRA will NOT satisfy your RMD. RMD must be distributed before converting to a Roth IRA if you’re 70 ½ or older.

6. CONSULT WITH A PROFESSIONAL

This article discusses some considerations, but every individual has difference circumstances and a professional should be consulted to provide advice before you take action. We would like to know your questions, concerns and reaction to this information. Please contact me at Rconger@cgtrust.com with any questions or comments you would like addressed.