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.

rothconversion_1r.gif
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.

Related Articles
  1. Retirement

    How Much Should You Have In Your 401(k) To Retire?

    Determining how much money should be in your 401(k) when you retire depends on several variables, many of which are uncertain.
  2. Investing

    How To Make Sure Your Healthcare Costs Do Not Ruin Your Retirement

    The best proactive plan of action for a stable retirement is to understand medical costs, plan ahead, invest properly, and consider supplemental insurance.
  3. Investing

    3 Small Steps to Maximize Your Investing Goals

    Instead of starting the New Year with ambitious resolutions, why not taking smaller manageable steps that can have a real impact.
  4. Investing

    7 Creative Ways to Save for an Early Retirement

    Take note of these out of the box steps you can take towards securing yourself an earlier, more comfortable retirement.
  5. Your Clients

    Tips for Making Your Nest Egg Last Longer

    If you’re trying to figure out how to make your hard-earned nest egg last, there’s one piece of advice that stands above the rest.
  6. Personal Wealth & Private Banking

    What People Hate About Financial Advisors

    Advisors need to make a living too, but doing so by cutting corners at a client's expense isn't right. Here are the top complaints against advisors.
  7. Retirement

    Retirement Plan Tax Prep Checklist

    Here's a list of items you need to have in order by tax time, including paying attention to those pesky required minimum distributions.
  8. Retirement

    When to Fire Your Advisor and Go Robo-Advisor

    Human financial advisor or robo-advisor: Which suits your needs best? Here are some general tips to help guide you to the right professional.
  9. Products and Investments

    Should Leavers Roll Over 401(k) Assets or Not?

    More and more companies are urging soon to be retirees to keep theirs assets in the company 401(k) plan. Is this a good idea?
  10. Retirement

    How a 457 Plan Works After Retirement

    457 retirement plans are complicated. Here's a quick guide to how they work after you retire.
RELATED FAQS
  1. Am I losing the right to collect spousal Social Security benefits before I collect ...

    The short answer is yes, if you haven't reached age 62 by December 31, 2015. The Bipartisan Budget Act of 2015 disrupted ... Read Full Answer >>
  2. Where else can I save for retirement after I max out my Roth IRA?

    With uncertainty about the sustainability of Social Security benefits for future retirees, a lot of responsibility for saving ... Read Full Answer >>
  3. When can catch-up contributions start?

    Most qualified retirement plans such as 401(k), 403(b) and SIMPLE 401(k) plans, as well as individual retirement accounts ... Read Full Answer >>
  4. Who can make catch-up contributions?

    Most common retirement plans such as 401(k) and 403(b) plans, as well as individual retirement accounts (IRAs) allow you ... Read Full Answer >>
  5. Can you have both a 401(k) and an IRA?

    Investors can have both a 401(k) and an individual retirement account (IRA) at the same time, and it is quite common to have ... Read Full Answer >>
  6. Are 401(k) contributions tax deductible?

    All contributions to qualified retirement plans such as 401(k)s reduce taxable income, which lowers the total taxes owed. ... Read Full Answer >>
Trading Center