Over the past week we’ve been writing quite a bit about retirement accounts, which ones are better for different situations, and talking about what the Roth IRA contribution limits are. Now I want to talk about another hot topic in retirement accounts, the 2010 Roth IRA conversion.
In case you haven’t heard all the buzz, this year marks a one time Roth IRA conversion event in which people can convert their traditional IRA’s, SEP IRA’s, Simple IRA’s, old 401k’s, old 403b’s into a tax free Roth IRA account. Because of the conversion event, waves of people are expected to take advantage this year and convert their traditional taxable investment accounts into tax free Roth IRA accounts.
Is It A Good Idea To Convert My Traditional IRA To A Roth IRA?
Before you even go down the road of converting your traditional taxable accounts, you’ll need to think about whether or not converting them is a good idea for your situation. There has been a lot of talk about it throughout the blogosphere, with some saying it’s a great idea for most to have their money grow tax free, while others aren’t as enthused because it seems like a way for the government to collect tomorrow’s tax income today, at a higher rate. As always consulting a financial professional before you make any moves is a good idea.
Among the things you need to consider:
- Do I want to pay tax now or later? Depending on what your tax rate is currently vs. when you retire, your amount of tax can vary quite a bit. The problem is, it can be hard to guess what tax bracket you’ll fall into in the future, much less predict if tax rates will go up in the future.
- Is my income too high to contribute or convert to a Roth IRA in the future? If you want to do a bit of tax diversification and your income is currently too high to contribute to a Roth IRA, this year may be one of your few chances to convert your traditional taxable account to a Roth.
- Do I want to spread out my tax liability from converting? As part of the conversion event people who convert will be able to spread out their tax liability over 2011 and 2012.
Benefits Of The 2010 Roth IRA Converson
There are quite a few benefits of converting to a Roth IRA this year
- $100,000 AGI rule removed: 2010 is big for so many because the $100,000 MAGI rule is lifted, making a conversion possible for even higher earning singles and couples. Previously only singles and married couples making less than $100,000 were able to convert.
- Tax doesn’t have to be paid 2010: 2010 is the year that you’ll actually convert to the Roth IRA, but the income to be claimed on your taxes is able to be deferred until 2011 and 2012. You can claim 50% of the conversion amount as income in 2011 and the other 50% in 2012. Remember, this stipulation is only good for the 2010 tax year, and then goes away.
- You can convert a 401k directly to a Roth IRA: If you have a 401k from an old employer, or another old retirement account, you can convert those this year as well.
- Tax free growth of assets, and tax free withdrawals: Converting means the money will grow tax free, and won’t have minimum distribution requirements once you turn 70 1/2.
Contribution Income Limitations Still Exist For New Roth IRA Contributions
Even though high income earners can convert their existing retirement accounts in 2010, that doesn’t mean that new contributions to their converted Roth IRA are allowed. If you’re over the IRA contribution phase out limits, you won’t be able to make new contributions to your Roth IRA.
How To Convert To A Roth IRA
Converting your IRA to a Roth IRA is going to be very similar to rolling over an account from an old 401k to a rollover IRA. If you’re not changing brokers or investment houses it may be as simple as filling out a form. The key is to contact a financial professional who can give you advice for your specific situation.
Are you going to be rolling over a Traditional IRA into a Roth IRA this year? If so, do you plan on deferring the taxable income into 2011 and 2012? If not, why are you decided not to convert? Tell us your story in the comments.
Last Edited: 25th January 2010