By Joseph A. Garcia
Taxpayers with adjusted gross incomes of more than $100,000 have
had to sit on the sidelines when it comes to converting their
traditional IRA to a Roth IRA. But recent tax law changes have
eliminated this restriction beginning in 2010, opening the door to
a popular tax-planning opportunity. Should you consider a Roth
conversion?
Taxpayers with adjusted gross incomes of more than $100,000 have had to sit on the sidelines when it comes to converting their traditional IRA to a Roth IRA. But recent tax law changes have eliminated this restriction beginning in 2010, opening the door to a popular tax-planning opportunity. Should you consider a Roth conversion?
The rules regarding IRAs are fairly straightforward. Contributions to a traditional IRA are tax-deductible, and withdrawals made at retirement are taxable. Conversely, a contribution to a Roth IRA is not tax-deductible, but retirement withdrawals are not taxable. In addition, the traditional IRA requires distributions beginning at age 70, while the Roth has no such requirement.
The absence of required distributions and other factors have made converting a traditional IRA to a Roth attractive to many taxpayers. But there is a catch – income taxes must be paid on the amount converted. To help cushion this burden, newly qualified taxpayers will be allowed to spread the tax over two years.
Is converting to a Roth a good idea for everyone? If you expect your tax bracket to be significantly lower at retirement, or you do not have non-IRA cash to pay the tax bill, then you might want to remain with the traditional IRA. However, the greater the number of years until retirement, the better the conversion looks. Be aware that there is some skepticism that this law will remain on the books until 2010. Until then, maximizing your traditional IRA annual contribution, or even contributing to a nondeductible IRA, might be a good strategy.
