New Rules Mean More People Doing Roth IRA Conversions In 2010

As we near the end of 2010, a lot of individuals have already done Roth IRA conversions, and plenty of others are questioning if a Roth IRA conversion in 2010 is the right move for them.

Why are Roth IRAs in the news so much this year? Previously, Roth IRA conversions were restricted to people who earned under a particular income limit ($100,000). A change in the guidelines, effective as of January 2010, removes the income restriction which means more individuals are allowed to to convert from traditional IRAs to Roth IRAs.

Part of this new rule is the ability to pay the taxes from any conversions done in 2010 over two years. Rather than having to pay out the taxes from the conversion all on a single tax return, the IRS is allowing you to pay off half in 2011 and half in 2012.

Even though the new rules may seem too good to pass up, you ought to check out the situation really carefully before jumping into a Roth conversion in 2010. Just because you could convert to a Roth doesn't mean you should do a conversion, at least not right away.

Before making a decision on whether to convert or not, here are a few fundamentals concerning traditional and Roth IRAs you should be well aware of:

Traditional IRAs

- Money put into traditional IRAs is tax deductible (income limits apply if you are covered by an employer sponsored retirement policy)

- Withdrawals from traditional IRAs are actually taxed at your ordinary income tax rate, so in case you are within the 15% tax bracket you'll pay off 15% on the amount withdrawn, if you're in the 28% tax bracket you'll pay out 28% on any distributions, etc.

- The IRS requires you to take a minimum amount out (primarily based on your age and the account balance) after age seventy 1/2.

Roth IRAs

- Contributions to a Roth IRA aren't tax deductible.

- You may not be allowed to contribute to a Roth IRA when your income is above the limits.

- Qualified withdrawals (must be at least age 59 1/2 and have had the Roth for a minimum of five years) aren't subject to income tax.

- In contrast to traditional IRAs, you aren't required to take money out of your Roth IRA when you reach age 70 1/2

Should You Do a Roth Conversion?

You should consider converting to a Roth IRA if:

- You expect to be in the exact same or higher tax bracket when you retire (or when you'll need the funds),

- You will not need the cash you convert for five years or more, and

- You could afford to pay the taxes on the conversion without dipping into your retirement savings.

It's essential to note that just because you can convert to a Roth IRA does not imply you need to convert to one. You must consult with a financial or tax expert to determine if a Roth IRA conversion is right for you, since every situation is totally different. A Roth conversion in 2010 might not make sense for you, but a conversion in future years might make sense if tax laws change or your own situation changes.

New Rules Mean More People Doing Roth IRA Conversions In 2010
As we near the end of 2010, countless people have already done Roth IRA conversions, and many others are questioning if a Roth IRA conversion in 2010 is the right move for them.

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