You may have read about some of the benefits of a Roth IRA, which includes tax-deferred growth, tax-free distributions, and no required minimum distributions (RMD) for the owner.

Perhaps you have considered converting your Traditional, SEP and/or SIMPLE IRAs to a Roth IRA so you could take advantage of those benefits. For those of you who could not complete Roth conversions because your modified adjusted gross income (MAGI) income exceeded $100,000 or you tax filing status was married and file separately, there is good news. The tax bill, Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) removed these restrictions and now gives you a reason to look at an option that was once unattainable for high income earners. Starting in 2010, tax-filing restrictions on Roth conversions will no longer apply, which could provide a big incentive to make the switch. Read on to find out more about what's happening, and how converting your Roth in 2010 may affect you. (For background reading, see 11 Things You May Not Know About Your IRA.)

TIPRA Became Law
President Bush signed TIPRA into law on May 17, 2006. This tax bill includes a provision dealing with converting Traditional IRAs to Roth IRAs. Starting January 1, 2010, the existing income and tax-filing restrictions for Roth conversions no longer apply. Further, investors who convert in 2010 can spread the income from the conversion over two years, 2011 and 2012, and thereby receive what amounts to an interest-free loan from the IRS, to be repaid over a two-year period.

Then, of course, the Roth IRA's gains will accrue on a tax-deferred basis, and will be tax-free if distributions are qualified.

What Else You Can Do

Look At The Nondeductible IRA
If your MAGI prevents you from making regular Roth contributions, a nondeductible IRA is the next best choice. You can make a nondeductible contribution provided you have eligible compensation and you are under age 70.5 for the year the contribution is being made. You can put away up to $5,000 ($6,000 if you are age 50 or older by the end of the year). Your spouse can contribute the same amount. These contributions can really add up over time.

As a hypothetical example, consider a married couple (each age 50) that invests $10,000 ($5,000 to each Traditional IRA) every year until age 65. Assuming an 8% average annual return, they'd end up with another $293,242 in their nest egg. They could then convert those accounts to a Roth, only owe tax on the growth of $143,242 ($293,242 - $150,000 = $143,242), and not have to worry about required minimum distributions or paying any more tax on those funds. (To learn more about RMDs, read Preparing for the RMD Season - Part 1 and Strategic Ways To Distribute Your RMD.)

Get Ready For The Tax
If you want to convert funds to a Roth, consider how much that tax might be.

For instance, imagine that your Traditional IRA is $136,000. Then, you'll have 2011 and 2012 to declare that $136,000 income and pay the tax. At the 28% tax bracket, the $38,000 tax could be spread over the two years. After that, you or your loved ones would never have to pay tax on qualified Roth IRA distributions - no matter how much it grows.

On the other hand, allowing the money to remain in a Traditional IRA could mean that you or your beneficiaries might have a bigger tax bill to face in the future. Let's look at an example, where an individual started funding accounts in 2006, with rollover amounts, assuming an 8% return and no additional contributions.

Figure 1

Gambling on Political Risk
This tax law provision was designed to be a short-term fund-raiser for the U.S. Treasury in 2011 and 2012 as billions of dollars are likely to be transferred into Roth IRAs. Some politicians, however, are critical because it will cost billions in lost tax revenue in the future when withdrawals from unconverted IRAs would have been taxed. Some feel that the rules could change in the future, resulting in Roth funds being taxable. This may be a point to discuss with your tax advisor.

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