Roth IRA conversions, previously unavailable to those with high incomes, are available to all taxpayers effective January 1, 2010. Consequently, all individuals should consider whether it is appropriate to convert their regular IRA or 401(k) into a Roth IRA. Make sure to check out this year's updates by reviewing the 2011 Roth IRA contribution limits.
Roth IRA Conversions – 2010 Changes
Previously, only people with a modified adjusted gross income (MAGI) of less than $100,000 could convert into a Roth IRA. (People who were married but filed separately were excluded no matter their income levels.) However, legislation removed the cap for 2010 and beyond.
What is a Roth IRA Conversion?
A Roth IRA conversion results from your voluntary decision to change your regular IRA into a Roth IRA. The primary advantage of a Roth IRA over a regular IRA is that qualified distributions from a Roth IRA are tax-free, whereas regular IRA distributions are taxable.
Roth IRA Conversions – Why Wouldn’t Everyone Do One?
When you convert a regular IRA or 401(k) into a Roth IRA, income taxes are due on the conversion. The amount of the tax is based on your marginal income tax rate and the existence of any previous non-deductible IRA contributions.
Roth IRA Conversions - Special Rules for 2010
For Roth IRA conversion taking place in 2010 only, half of the taxable income from the Roth IRA conversion will be included on your 2011 return and half on your 2012 return. You can also choose to report all of it on your 2010 return, but then you lose the advantage of delaying the timing of your tax payments. On the other hand, depending on your other income and future legislation, higher tax rates are possible in future years.
Roth IRA Conversions – How to Decide if One is Right for you
Determining whether a Roth IRA conversion is a good idea for any given individual is complicated. Fortunately, there are several web-based calculators (see below) which can help you determine whether it would be a good idea for you to convert your regular IRA into a Roth IRA. Since the assumptions which are part of any calculator are a significant part of its recommendation, it’s best to use more than one calculator before deciding whether to convert.