Roth IRA Conversion

The following is a copy of an article from “Retirement & Tax Planning Specialists”

To Roth or not to Roth – that is the question!

It may be a good idea to convert part or all of a traditional IRA to a Roth IRA in order to receive tax-free investment returns and escape minimum distribution requirements. Conversions are subject to ordinary income tax. If a Roth IRA conversion takes place in 2010, the taxpayer has the option to spread paying the taxes over the next years – 2011 and 2012. You do not have to convert 100% of your IRA into a Roth. You can make a partial conversion; the amount usually depends on both your current income tax bracket and your estimated future tax bracket.

The ability to convert from an IRA to a Roth IRA depends on your Adjusted Gross Income (AGI), which must be less than $100,000. Unfortunately, many taxpayers who would like to convert are not eligible. However, this AGI limitation goes away in 2010, so if you’re currently ineligible it may be a good idea to start planning for this possibility in the near future.

If you do convert, you are allowed to change your mind and reverse the conversion (also known as re-characterization) in the future (but only one reversal per year). For example, if you find out later that you exceeded eligibility limits or that your account value has dropped, you can reverse the conversion at a lower tax cost. In fact, you can do this as late as October 15th, 2010.

The tax rules regarding Roth IRAs can be very complicated and confusing. For example, a Roth IRA distribution can only be qualified if you’ve had the account for at least five years and the distribution is made after you’ve reached age of 59 1/2, otherwise early withdrawals could result in a 10% federal income tax penalty….

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