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New Regulations Imply Much More People Doing Roth IRA Conversions In 2010

As we near the end of 2010, many individuals have already accomplished Roth IRA conversions, and lots of others are questioning if a Roth IRA conversion in 2010 is the right move for them.

Why are Roth IRAs in the news so much this year? Previously, Roth IRA conversions were limited to people who earned under a particular income limit ($100,000). A change in the guidelines, effective as of January 2010, removes the income restriction which means much more individuals are allowed to to convert from traditional IRAs to Roth IRAs.

Part of this new rule is the ability to pay the taxes from any conversions carried out in 2010 over two years. Rather than having to pay off the taxes from the conversion all on a single tax return, the IRS is permitting you to pay out half in 2011 and half in 2012.

Although the new regulations may seem too good to pass up, you ought to check out the situation really carefully before jumping right into a Roth conversion in 2010. Just because you could convert to a Roth doesn't mean you should do a conversion, at the least not right away.

Before you make a decision on whether to convert or not, here are a few fundamentals concerning traditional and Roth IRAs you ought to be well aware of:

Traditional IRAs

- Money put into traditional IRAs is tax deductible (income limits apply if you are covered by an employer sponsored retirement plan)

- Withdrawals from traditional IRAs are actually taxed at your ordinary income tax rate, so if you're within the 15% tax bracket you will pay out 15% on the amount withdrawn, if you're in the 28% tax bracket you'll pay 28% on any distributions, etc.

- The IRS requires you to take a minimum amount out (primarily based on your age and the account balance) after age seventy 1/2.

Roth IRAs

- Contributions to a Roth IRA aren't tax deductible.

- You might not be allowed to contribute to a Roth IRA when your income is above the limits.

- Qualified withdrawals (have to be at least age 59 1/2 and have had the Roth for at least five years) aren't subject to income tax.

- Not like traditional IRAs, you aren't required to take cash out of your Roth IRA when you reach age 70 1/2

Should You Do a Roth Conversion?

You should consider converting to a Roth IRA if:

- You expect to be in the same or higher tax bracket when you retire (or when you'll need the funds),

- You would not need the cash you convert for 5 years or more, and

- You could afford to pay the taxes on the conversion without dipping into your own retirement savings.

It's important to note that just because you can convert to a Roth IRA does not imply you need to convert to one. You must check with a financial or tax expert to determine if a Roth IRA conversion is right for you, since every situation is different. A Roth conversion in 2010 might not make sense for you, but a conversion in future years might make sense if tax laws change or your very own situation changes.

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