| June 21 2010
Prior to 2010, only taxpayers with adjusted gross incomes below $100,000 were eligible to convert a traditional IRA to a Roth IRA. But as of January 1, 2010, the $100,000 adjusted gross income restriction was eliminated as a result of the Taxpayer Increase Prevention Act (TIPRA) enacted on May 17, 2006. Under TIPRA, taxpayers who had previously been ineligible to contribute to a Roth IRA are now eligible to convert not only their traditional IRA accounts, but also 401(k), 403(b), and 457 accounts to Roth IRAs (assuming the account-holders are otherwise eligible for a qualified plan distribution).
Converting a pre-tax account to an after-tax Roth IRA requires payment of income tax on the amount converted. For conversions made during 2010, taxpayers are eligible to defer the reporting of taxable income to the next two tax years. In other words, 50% of the converted amount will be reported on the taxpayer's 2011 return and 50% will be reported on the 2012 return. The opportunity to defer the reporting of income exists only for 2010 conversions. Alternatively, taxpayers may elect to report 100% of the converted amounts on their 2010 returns and pay the tax all in one year.
With a little creative planning, the new rules present the following opportunities:
• Risk-free conversion. A taxpayer who converts all or a portion of a traditional IRA in January, 2010 may evaluate whether the conversion was a good idea until October 15, 2011 (assuming the taxpayer extended the due date for his or her 1040). If the account value decreased from the amount that was converted (i.e., the taxable amount) the taxpayer may recharacterize the Roth IRA back into a traditional IRA to avoid paying tax on dollars that no longer exist.
• Avoid RMD's. Because Roth IRA's do not require mandatory distributions beginning at age 70½, assets in a Roth IRA account may grow, tax free, throughout the taxpayer's lifetime.
• Annual Contributions. A taxpayer who is ineligible to contribute to a Roth IRA because of AGI limitations may now contribute to a traditional IRA and simply convert the contributed dollars to a Roth IRA during the same tax year.
• Estate Tax. Another advantage to the Roth IRA conversion is that income taxes paid on the conversion are paid with pre-estate tax dollars.
• Charitable Giving. A taxpayer with a charitable deduction carry-forward or a taxpayer who desires to make a large charitable gift could utilize the charitable deduction to produce an off-setting 50 percent (or 30 percent or 20 percent depending on the type of charitable deduction) income tax deduction which would serve to potentially off-set some of the income tax cost of the conversion.
