2010 Roth Conversion

The new 2010 Roth IRA conversion rules allow anyone to convert IRAs to a Roth IRA regardless of income level.

If you are leaving your job or planning to retire, you may rollover your retirement accounts to a Roth IRA.

Things to consider

When you convert to a Roth IRA, you may have to pay income taxes on any taxable portion of the conversion amount. Because the Roth conversion must occur on a pro rata basis, you are not allowed to choose to convert only the after-tax portion of the contributions.

Tax payment options

You should pay the conversion taxes when you file your tax return for the year of the conversion. However, if the conversion occurs in 2010, you can either pay the entire tax bill when you file your 2010 tax return, or you can report half of the taxable amount of the conversion with your 2011 return and other half with your 2012 return. Keep in mind that splitting the conversion income may increase your tax rate in 2011 and 2012.

When you pay the taxes, you can use the money in the converting IRA for payment. However, it's generally better to pay the taxes with your cash on hand instead of the IRA money because, if not, you may lose the advantage of potential tax-free growth on the full amount of the Roth conversion and may be subject to 10% penalty tax in case of the early withdrawal before age 59 1/2.

Potential beneficiaries

Then who may be the main beneficiary of the 2010 Roth conversion? For many people, the Roth conversion may make sense. However, just because high income earners can convert to a Roth IRA now dose not mean that they have to. To convert or not depends on your situation. If you are in the following situations, the conversion may make sense.

• Expected tax bracket. If you think that your retirement income will be same or higher than current income, paying taxes now may make sense. You might expect that tax rates will rise continuously regardless of your income.


• Long term investment. If you retire soon, you don't have enough time to outperform the opportunity cost of taxes paid for the Roth conversion.


• Estate planning. You may not need to use the Roth IRA money and want to transfer to your heirs. Then they generally don't have to pay income tax on the withdrawals. Moreover, you may reduce your total estate by paying the conversion tax now.