IRA Conversions
11/2/2009
The tax law changes in 2010 so that everyone will have the ability to convert a traditional IRA to a Roth IRA. Historically, this option has only been available for taxpayers with modified adjusted gross income that did not exceed $100,000 in the rollover year.
Starting in 2010, you may be able to roll funds over from a regular IRA into a Roth IRA so the post-rollover income can grow tax-free in the Roth IRA. Any funds rolled over will be taxed under the regular IRA distribution rules as if there were no rollover, but the 10% early withdrawal penalty will not apply. If rollover funds are withdrawn within the five year period that renders them taxable, the 10% penalty will apply to the portion of withdrawal attributable to the growth. In addition, with a 2010 conversion, you can choose to either have the income taxed in 2010, or you can spread the resulting taxable income evenly over 2011 and 2012, and thereby defer the related taxes.
This strategy may be especially timely if the value of your traditional IRA has significantly declined, or if you expect to pay higher federal income tax rates in future years than you pay now. Because of the income taxation, however, you may wish to also consider strategies for minimizing the impact. For example, you may wish to consider conversions in multiple years, or consider strategies such as charitable giving or other increased itemized deductions that would offset a portion of the additional income.
If you would like further information about this new opportunity, please do not hesitate to contact Tom Dougherty at 612-336-9330 or tdougherty@lommen.com.