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    0 Replies Latest reply on Oct 20, 2009 6:39 PM by TheAccountant

    2010 Year of the Roth?

    TheAccountant Wayfarer

      2010 Year of the Roth?

      As of January 1, 2010, folks at any income level will be able to convert their traditional individual retirement accounts (IRAs) into Roth IRAs.


      Under current rules, Roth IRA conversions are allowed only for taxpayers with incomes of $100,000 or less. However, the $100,000 adjusted gross income limit will be repealed for tax years beginning after December 31, 2009. Moreover, for conversions taking place in 2010, the tax on the conversion can be spread out ratably over 2011 and 2012.


      Many of you may be unaware of this upcoming opportunity, however. According to a survey by USAA Wealth Management, found that the vast majority (73%) of Baby Boomers with traditional IRAs have no plans to convert in 2010. What's more, among survey respondents who own an IRA and who have household incomes of $100,000 or more, a whopping 57% were unaware that the income limit on conversions would be eliminated next year, and only 9% planned to convert their accounts in 2010.


      You may also be unaware of how a conversion works. According to the USAA survey, two-thirds of IRA owners surveyed weren't aware that any taxes would be due on converted funds. And of the one-third who were aware taxes would be due, one in 10 (11%) didn't realize they would be able to spread the tax bill over two years.

      Roth IRA Basics

      A Roth IRA is basically the mirror image of a traditional IRA. No deduction is allowed for contributions to a Roth IRA, but qualifying distributions are tax-free http://Code Sec. 408A. Moreover, unlike traditional IRAs, contributions can be made to a Roth IRA after age 70 ½ and the minimum distributions rules do not apply to Roth IRA owners before death.


      An individual can contribute up to the lesser of: (1) $5,000 or (2) 100 percent of compensation to a Roth IRA. IRC §408A(c)(1) In addition, taxpayers age 50 or over may make catch-up contributions of up to $1,000 each year. Allowable contributions are phased out ratably once adjusted gross income hits certain levels, which are adjusted annually for inflation. For 2009, the phase-out ranges are $159,000 to $169,000 for joint filers and $101,000 to $116,000 for single filers and heads of households.


      A traditional IRA can be converted to a Roth IRA by means of a rollover or transfer of the funds from the traditional IRA to a Roth IRA http://Code Sec. 408A(c)(3). However, the conversion is subject to income tax as if the funds in the traditional IRA were distributed and were not rolled over (although the conversion is not subject to 10% penalty tax on premature withdrawals).


      As noted above, conversions are currently allowed only for taxpayers with adjusted gross incomes of $100,000 or less. But that will change. Starting in 2010, taxpayers at any income level will be able to make regular-to-Roth IRA conversions. In addition, for conversions taking place in 2010 only, the gross income resulting from the conversion will be included in income ratable over two tax years beginning in 2011 http://Code Sec. 408A(d)(3)(iii).

      Is 2010 "The Year of the Roth?"

      Clearly, a Roth IRA conversion is not for everyone. The decision to roll over traditional IRA savings into a Roth IRA will depend on an analysis of many factors (the client's age, amount of IRA savings, retirement income needs, etc.( as well as some crystal-ball gazing (how will the up-front tax on the conversion compare to the future tax on traditional IRA distributions?). Nonetheless, 2010 may be the "Year of the Roth" for folks who have been previously locked out.


      "There may never be a better time than in 2010 to create a tax-free income stream for retirement," said Terri Kallsen, senior vice president, USAA Wealth Management. "The combination of lower account values, historically low income tax rates, conversion income limits lifting and the ability to pay the tax bill over two years provides a rare opportunity to potentially increase your income in retirement by hundreds, and even thousands, of dollars each month by eliminating taxes through a Roth IRA."