The Roth IRA Conversion Conundrum

The major issue in retirement planning has been whether to convert from a traditional IRA to a Roth IRA. That’s because in 2010, Congress has eliminated the income restriction for such a conversion. Previously, anyone with an adjusted gross income of $100,000 or more was precluded from doing so. Beginning in 2010, married couples filing separate returns may also convert.

If you currently have a traditional IRA, then you are required to take your minimum distributions by December 31st of the year in which you attain the age of 70 1⁄2. The exception to that rule was in 2009, when, due to the economic meltdown in the value of accounts, Congress suspended the taking of required minimum distributions. The conversion may be advantageous, as assets in a Roth IRA grow tax-free and are not subject to required minimum distributions during your lifetime. If you have sufficient income from other sources (i.e., Social Security, pension benefits and dividends and interest), you may not need to withdraw income from your Roth IRA after you retire. This would allow you to accumulate tax-free income and your Roth IRA could essentially act as a “tax shelter,” passing additional wealth to your beneficiaries upon your death.

In 2010 only, the taxable conversion amount will automatically be divided equally between 2011 and 2012, with one-half taxed as ordinary income in 2011 and the other half taxed in 2012. In subsequent years, the tax bill on the converted amount must be paid in the year in which the conversion is completed.

The Estate Planning & Elder Law Center does not dispense tax or investment advice. Thus, to learn more about whether a conversion is appropriate and advantageous for you, please consult with your financial advisor and/or CPA.