2010 Roth IRA Conversion Questions

 

Do you benefit from the 2010 Roth IRA Changes?
The Roth IRA has long been considered an ideal tool for growing your retirement portfolio—potentially Tax Free. All qualified withdrawals from a Roth IRA are tax-free after the age of 59½; plus there are no required distributions at 70 ½.
However, in the past there were income limitations to qualify. In 2010, the Modified Adjusted Gross Income (MAGI) limits on a Roth IRA will be lifted for all conversions. If you have a non-Roth retirement account and you want to convert it to a Roth IRA you should seriously consider and seize upon the Roth IRA advantages that you've been hearing so much about.
Another huge benefit for 2010 only – if you convert an existing retirement account to a Roth IRA, you can split the converted income amount between 2011 and 2012, which means that you would not pay any taxes in 2010 on the amount converted.
 

What are the Roth IRA Advantages?
·    Qualified withdrawals are tax-free
·    Investment profits compound tax-free
·    No required withdrawals at age 70 ½
·    You may be able to pass on earnings to beneficiaries tax-free
 

What are the requirements to convert to a Roth IRA?
Income/Taxation Requirements & Deadlines
Previous
Requirements
2010 Requirements
Modified Adjusted Gross Income Limit for Filing Single
$100,000 or less
No Limit
Modified Adjusted Gross Income Limit for Married Filing Jointly
$100,000 or less
No Limit
Taxation Rule for Conversions from non-Roth Accounts
Year the conversion took place
You can split the amount due between 2011 and 2012
Conversion Deadline
December 31
December 31


Reducing tax exposure for your portfolio makes a big difference
The main benefits of the Roth IRA, such as tax-free investment profits and tax-free withdrawals, can have a dramatic affect on your wealth.
For example: If you were to contribute $5,000 a year to a Roth IRA starting in 2010 and assume an 8% compound interest rate of return over a period of 25 years, your Roth IRA would be worth $399,772 at the end of year 25.
If you made the same investment outside of a Roth IRA in a non-tax sheltered account, assuming a 31% tax rate, it would only be worth $234,443. That is over 41% less cash in your pocket at retirement!


Timing is everything – This opportunity may not last forever
While, according to the IRS, there is no deadline by which you must convert your retirement accounts in order to take advantage of the suspended income restrictions, some speculate that the opportunity will not exist indefinitely, and possibly may go away sooner than later. There also a good chance, federal individual income taxes will increase in 2011, so that needs to be taken into consideration.
 
Disclaimer: Before converting an existing retirement account to a Roth IRA, we recommend seeking advice of a professional of tax professional to make sure you have a clear understanding of how the tax rules may affect you.
 

 
For more information on things to consider regarding the 2010 Roth conversion and how it may benefit you, contact us today!