Things You Should Know About The 2010 Roth IRA Conversion Rules

Yesterday I wrote about retirement accounts, and talked about which ones are better for different situations.   Today I want to talk about another issue that’s been getting a lot of press lately, the 2010 Roth IRA conversion.

In the event you’ve been living under a rock and haven’t heard about the  Roth IRA conversion event this year, it is basically a one time event where 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.  Here are the details.

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Should I Convert My Traditional IRA To A Roth IRA?

The first thing you need to ask yourself before you even start going down this road of converting your taxable retirement accounts is whether or not it’s even a good idea for you in your situation.   A lot of people hve explained the benefits or a Roth IRA conversion, while others are saying that the conversion event has been overhyped.   Cynics might say it’s just a way for our government to collect on future tax money today – at a higher rate than most people would have paid in retirement.  Regardless of whether that’s the case, there are some things you should consider:

  • Pay taxes now or later?  Do you want to pay your taxes on the money you invest now, or when you retire?  The amount of tax you pay can very quite a bit depending upon what tax bracket you fall into either now vs. when you retire.   Problem with this – it’s hard to know the future and know what tax rate you’ll be paying in the future – and whether taxes will increase. (Where’s my crystal ball when I need it?)
  • Is my income too high to contribute or convert to a Roth IRA in the future? If  you’re a high income earner and you you want to do a bit of tax diversification, this year may be one of your few chances to convert your traditional taxable account to a Roth because of income restrictions.
  • 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.  More time to pay your taxes!

Reasons To Take Advantage Of The 2010 Roth IRA Conversion

Here are a few benefits of converting your taxable retiremenet account to a Roth IRA this year

  • AGI limit of $100,000 – rule removed:  Previously singles and married couples making less than $100,000 were the only ones able to convert their taxable accounts to a Roth IRA.  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.
  • Tax payments can be spread out: You’ll convert to the Roth IRA in 2010, but the income to be claimed on your taxes and taxes owed can be deferred until 2011 and 2012.   Converters can claim 50% of the conversion amount as income in 2011 and the other 50% in 2012.  Remember, this is a one year provision for the 2010 tax year only.
  • Old 401ks can be converted directly to a Roth IRA:  Have an old 401k from an old job?  You can convert those this year as well.
  • Your assets grow tax free, and tax free withdrawals: Converting means the money will grow free of tax burdens, and you won’t have to have a minimum distribution requirement until you turn 70 1/2.

Contribution Income Limitations: Still There For New Roth IRA Contributions

One thing to remember about the Roth IRA conversion event is that just because high income earners can convert their taxable accounts, it doesn’t mean they can also open and add new contributions to a new Roth IRA.    If  their income is over the IRA contribution phase out limits,  they won’t be able to make new contributions to a Roth IRA.

How To Convert To A Roth IRA

Converting your taxable account to a Roth IRA will be alot like rolling over an old 401k to a Rollover IRA.   If you’re not changing the investment company that your funds are with,  it could  be as easy as filling out a form.  The key is to contact a financial professional who can give you advice for your specific situation.

Are you considering whether to rollover a traditional taxable account to a Roth IRA?  Will you be deferring on the taxable income until 2011 and 2012?   Have you decided not to convert? Tell  us why in the comments!

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I’m a thirty-something Christian Midwestern father of one son, and have been happily married for 9 years to my beautiful wife. I love playing tennis, shooting hoops, or taking part in the occasional flag football game. Of course, I love writing and financial topics as well, and that's how this site came into being! Check me out on Google +!

Last Edited: 21st May 2010


    Share Your Thoughts:

  1. says

    I believe there’s a wave of Roth Mania out there. All the data showing how we’re not saving enough, yet at the same time we think we’ll be in a higher bracket.
    There are circumstances where it makes sense to convert and those where it doesn’t.
    Few people will benefit from a wholesale conversion of all their IRA assets. Most may benefit from just converting enough to fill (top off) their current bracket. This is what I’m likely to start doing this year.

  2. Stephen says

    I have 6200 in a 401k that I want to roll into a Roth IRA. If I can only contribute $5000, what do you suggest I do with the remainder? I don’t want to cash out because of the penalty I would face.


  3. Allie says

    We are retired and don’t need our 401K. My husband is now collecting because he is past the 70 1/2. We find we can live just fine on our pension(which we use to convert our IRA’s, give to the kids and save) and we use our SS to live on. We convert some of our IRA’s each year so that the kids can inherit the Roth tax free. I still use coupons and shop sales. I find it fulfulling to give our extra to those that do not have and to teach them how to live frugally. In fact now I am going to buy some $5 purses for the Christmas boxes for the poor and some Kellogg’s cereal with coupons for 99 cents.

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