Roth IRA Conversions in 2010

A unique opportunity for IRA owners.
Presented by Mark Lund, The Investor Coach

A Roth IRA permits tax-free growth and tax-free income distributions in retirement (assuming you are age 59½ or older and have held your Roth account for 5 years or longer). You can contribute to a Roth IRA after age 70½, without having to take mandatory withdrawals. While contributions to a Roth IRA aren’t tax-deductible, the younger you are, the more attractive a Roth IRA may seem.2

However, older investors have reason to go Roth as well – especially if they don’t really need to withdraw IRA assets. Under present tax law, converting an untapped traditional IRA to a Roth will shrink the size of your taxable estate, and careful estate planning could foster decades of tax-free growth for those IRA assets.3

Currently, if you name your spouse as the beneficiary of your Roth IRA, your spouse can treat the inherited IRA as his or her own after you die and forego withdrawals. So those Roth IRA assets can keep compounding untaxed across the rest of your spouse’s life.4

If your spouse then names a son or daughter as a beneficiary, that heir has the choice to make minimum withdrawals according to his or her life expectancy, all while the assets continue to compound tax-free. Currently, withdrawals from an inherited Roth IRA are not subject to income tax.3

Why you may want to think twice about it. The IRS regards a traditional IRA-to-Roth IRA conversion as a distribution from a traditional IRA – a taxable event.5 You’ll need to pay taxes on the entire amount of the conversion.

Guess what, though: the federal government is giving you a tax break this year. If you do a Roth conversion in 2010, you can choose to divide the taxes on the conversion between your 2011 and 2012 federal returns. So you won’t have to finish paying them until April 2013.6 As long as taxes don’t go up this may be a good idea for you.

If you talk to your local tax preparer, CPA or financial planner, you will probably find all of them agreeing on one thing: federal income tax rates are likely to be higher in the future than they are now (they are currently scheduled to go up in 2011.) This is another reason why 2010 may be a good time to convert and pay in full in 2010.

You may be tempted to use the current IRA assets to pay the conversion tax, but should you? If you’re younger than 59½, you’re looking at a 10% penalty on the amount you withdraw, and you’ll lose the chance for tax-free compounding of those assets within the Roth IRA.6

Be sure to consult your tax advisor before you convert. This is a very good idea before you arrange any rollover, trustee-to-trustee transfer, or same-trustee transfer of your IRA assets. There are many variables to consider, and they differ greatly from person to person. In any year, you should fully understand the potential tax impact of a Roth conversion on your finances and your estate.

Also, remember that while the income limit on Roth IRA conversions will go away in 2010, the income limits on Roth IRA contributions still apply next year and for the foreseeable future. So high-income IRA owners can make the conversion, but they may not be able to pour new money into the account. For 2010, the MAGI phase-out limits kick in at $105,000 for single filers and $167,000 for joint filers.However, those income limits don’t prevent you from contributing to a traditional IRA in 2010 and converting that IRA to a Roth.7

If you would like to learn more about how to diversify your Roth IRA, please give us a call.


1 kiplinger.com/magazine/archives/2009/01/sweet-deal-on-roth-ira-conversion.html [1/09]
2 thestreet.com/print/story/10505164.html [5/26/09]
3 smartmoney.com/personal-finance/retirement/estate-planning-with-a-roth-ira-7966/ [1/22/09]
4 smartmoney.com/personal-finance/retirement/roth-iras-to-convert-or-not-7965/ [1/10/08]
5 smartmoney.com/personal-finance/retirement/roth-iras-you-wanted-to-know-7967/ [1/9/08]
6 cnbc.com/id/34511917 [12/21/09]
7 northjersey.com/news/business/82334757_Make_a_New_Year_s_to-do_list_to__bring_home_the_bacon__.html [1/22/10]

– This material is provided for general and educational purposes only and is not intended as tax, legal or investment advice [or for use to avoid penalties that may be imposed under U.S. Federal tax laws]. Please consult your tax advisor for advice regarding your personal tax situation.

– Conversion from a traditional IRA to a Roth first requires paying taxes on any pre-tax contributions, plus any gains. Additionally, the money used to pay these taxes cannot come from your traditional IRA without a 10% penalty, if you are under age 59-1/2.

These are the views of Peter Montoya Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.

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About the Author ()

Mark K. Lund is the firm's founder, CEO and author of The Effective Investor, a #1 Best Seller. He has written articles for or been quoted in: The Wall Street Journal, The Salt Lake Tribune, The Enterprise Newspaper, The Utah Business Connect Magazine, US News & World Report, and Newsmax.com, just to name a few.  Mark publishes two newsletters called, “The Mark Lund Growth Report” and “Mark Lund on Money.”  Mark provides CPE (continuing professional education) courses for CPAs.  You may also have seen him on KUTV Channel 2, or as a guest speaker at a local association or business. Mark provides investment and retirement planning services for individuals and 401(k) consulting for small businesses. In his book, The Effective Investor, Mark exposes the false narrative magazines, media, big Wall Street firms, and most advisors want you to believe. The good news is that Mark will show you that you don’t need their speculative ways of investing in order to be successful. Get a free copy when you schedule your initial consultation.

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