Thanks to recent changes, the $100,000 modified adjusted gross income (MAGI) and tax filing status limits on Roth conversions have been removed beginning in 2010. Plus, for 2010 only, you can spread your potential tax burden for the conversion into equal installments over tax years 2011 and 2012.
Why Convert to a Roth? Roth IRAs have a number of potential advantages over Traditional IRAs and qualified retirement plans like 401(k)s, 403(b)s, or 457 plans. While these types of plans allow for tax-deferred growth on your retirement assets, Roth IRAs also offer tax-free growth on potential earnings distributed after age 59½, death, disability, or first time homebuyers as long as you hold the Roth for at least five years. Other positive features include:
- With a Roth IRA, unlike Traditional IRAs, there is no requirement to begin taking required minimum distributions at age 70½.
- Roth IRA beneficiaries can also enjoy tax-free distributions, supporting important estate planning options.
- Tax diversification of retirement assets allows for more flexibility to manage taxable income in retirement.
Generally, Roth IRA conversions may make sense if you:
- Won’t need the converted Roth funds for at least five years
- Expect to be in a higher tax bracket during retirement
- Can pay the conversion taxes without using the IRA funds themselves
- May not need the funds for retirement and may want to transfer them to your heirs
Speak with your tax advisor to help assess your own situation. Here are a few things to consider:
- The conversion could elevate you to a higher tax bracket
- Smaller conversions over time might make more sense
- Potential tax rate changes for the 2011 and 2012 tax years
- Investment losses you may recently have experienced might result in a lower conversion tax bill