It’s the opportunity most people have been waiting for. With the lure of tax-free distributions, the Roth IRA has become a popular retirement savings vehicle since its introduction in 1998. But in the past, if you were a high-income taxpayer, chances are you have not been able to participate in the Roth revolution. Well, that’s now changed. Starting in 2010, a new era has begun. Anyone can convert a traditional IRA into a Roth IRA, regardless of income or filing status. Even Simplified Employee Pension (SEP) IRAs and SIMPLE IRAs can be converted.
So why would you want to convert to a Roth IRA? A Roth IRA can serve as a source of tax-free income after you retire. Once you reach 70 and a half you will not be required to make minimum distributions like the traditional IRA. This will allow your Roth IRA to continue to grow during your lifetime.
What are the income tax consequences to a Roth conversion?
If you make a conversion in 2010, you have the option of reporting all income in 2010 or to defer reporting until 2011 and 2012. For example, if have a traditional IRA of $100,000 funded by pretax dollars and you convert the entire amount to a Roth IRA in 2010. Using the deferred reporting option, you won’t report income in 2010, instead you will report half of the income ($50,000) in 2011, and the other half ($50,000) in 2012.
Is a Roth conversion right for you?
The answer to this question depends on many factors, including your income tax rate, the length of time you have until you retire, your state’s tax laws, and how you’ll pay the income taxes due at the time of the conversion. And don’t forget–if you make a Roth conversion and it turns out not to be advantageous, IRS rules allow you to “undo” the conversion (within certain time limits).
Why not let a financial professional help you decide whether a Roth conversion is right for you?
For more information contact Rebecca Robins, CPA/PFS, CFP™, CA Insurance Lic#0D75745 at 661-222-2331, located at 25129 The Old Road, Suite 105 in Stevenson Ranch. Securities offered through Associated Securities Corp. (ASC), member FINRA/SIPC. Advisory services offered through Associated Planners Investment Advisory, Inc (APIA), ASC, David S. Reinders, CFP, Inc., Registered Investment Advisors. David S. Reinders, CFP, Inc. is not affiliated with ASC or APIA.