The Year of The Roth

Income limits on Roth IRA conversions have been eliminated for 2010. Should you consider converting?

Recent legislative changes have made it even easier to convert a traditional IRA to a Roth IRA. That’s why now may be a good time to consider this option.

The year to take action

In 2010, the Modified Adjusted Gross Income (MAGI) limits have been eliminated for Roth IRA conversions. This means that every investor, regardless of income or tax filing status, will have the opportunity to convert an IRA (traditional, rollover, SEP^[1], or SIMPLE^[2]) into a Roth IRA.

Since the account to be converted was built with pre-tax contributions, you’ll have to pay income tax on the amount converted. But, for 2010 conversions, you have the option to pay income taxes as usual or include the amount converted equally in tax years 2011 and 2012.

The Roth IRA conversion decision

Before you consider converting any of your assets, you’ll want to make sure that a Roth IRA conversion makes sense for your financial situation. Consider the following issues:

Taxes. Determine how much you’ll need to pay in taxes—both now and in retirement—and whether you should convert to a Roth IRA in order to benefit from future federal income tax-free qualified distributions.
Years until you take distributions. The longer you have until you withdraw funds, the greater the potential benefits of a Roth IRA.

See a comparison of a traditional IRA vs. Roth IRA. (PDF: 30 KB)

Converting is easy

Talk with your financial professional and tax advisor to determine if a Roth IRA is right for you.

^[1]: Conversions are subject to federal income taxes. State taxes also may apply: check with your local tax advisor. Refer to IRS Publication 590, Individual Retirement Arrangements (IRAs) for a complete discussion of making contributions and taking withdrawals from IRAs.
^[2]: Subject to the plan’s distribution rules.