How You Can Benefit By Converting Your Traditional IRA To A Roth IRA

The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) was signed by President George W. Bush in May 2006.  This act contained several revisions to preexisting tax laws.  Included in these taxpayer friendly revisions were the “kiddie tax,” the extension of lowered capital gain taxes and the extension of higher exemption amounts for the alternative minimum tax (AMT).

However, TIPRA also also gave us something with far-reaching potential, all the way to the future retirement of the American public.  In 2010, the existing $100,000 modified adjusted gross (MAGI) limit on the conversion of traditional IRAs has been eliminated.  This means that taxpayers earning above $100,000 are now eligible to convert their traditional IRAs to Roth IRAs.  In addition, in 2010 ONLY, you may elect to soften the tax blow and spread the taxes incurred over two years and effectively manage your tax bracket.

“With strict limits on contributions, never before have clients had the ability to place essentially a limitless amount of money into a Roth IRA and receive such favorable tax treatment: Tax-Free growth and Tax-Free distributions”

Why the change?

Any good finacial steward would now ask the question:  Why is the government allowing us this benefit?  The answer is two-fold:

1) The government is in need of funds now and they are acutely aware of a very valuable economic principle.  With inflation looming, the dollar is worth much more today than it will be in the future.

2) With the national deficit as high as it is and the current programs in need of immediate funding, our government has to make a quick buck.  The conversion, while a fantastic strategy for the average investor, provides the government with a much-needed infusion of capital and an increase in value on an asset that it currently holds.

Tax-Free growth and distribution.

Bottom line, you can pay the tax now on the conversion while the income rate is at a historic low and pull the money out Tax-Free later while everybody else is still paying for today’s national debt.

What’s new in 2010 for Roth IRAs

From IRS service publication 590:

Conversions to Roth IRAs.

In 2010, the modified AGI and filing status requirements for converting a traditional IRA to a Roth IRA are ELIMINATED.  Also, for any 2010 rollover from an IRA other than a Roth IRA to a Roth IRA, any amounts that would be included as income will be included in equal amounts in 2011 and 2012.  You can choose to include the entire amount in income in 2010.

Regular Roth IRA contributions.

Modified AGI limit for Roth IRA contributions increased.  For 2010, your Roth IRA contribution limit is reduced (phased out) in the following situations.

* Your filing status is married filing jointly or qualifying widow(r) and your modified AGI is at least $167,000.  You cannot make a Roth IRA contribution if your modified AGI is $177,000 or more.

*Your filing status is single, head of household or married filing separately and you did not live with your spouse at any time in 2010 and your modified AGI is at least $105,000.  You cannot make a Roth IRA contribution if your modified AGI is $120,000 or more.

*Your filing status is married filing separate, you lived with your spouse at any time during the year and your modified AGI is more than -0-.  You cannot make a Roth IRA contribution if your modified AGI is $10,000 or more.