In January of 2010 the income limits associated with the conversion of a traditional IRA to a Roth IRA will be lifted.
Until this rule changed, investors whose adjusted gross income exceeded $100,000 a year were unable to do the conversion. Converting to a Roth IRA from a traditional IRA currently is a taxable event. In 2010, however, an opportunity will occur. That opportunity is the ability to convert to a Roth and pay the tax over two years. Contributions to the Roth are not tax-deductible, but the investment earns interest tax-free, and the investor receives tax-free withdrawals in retirement. The only other conversion opportunity was when the Roth was first introduced in 1997.
By contrast, an IRA allows investors to make tax-deferred contributions, but the withdrawals in retirement are taxed.
Please seek the advice of Law & Associates, Inc. or another financial or tax advisor before considering the conversion.
The option to spread federal income taxes over two years applies to 2010 only. For conversions occurring after 2010, the federal income taxes must be paid in full the following tax year going forward. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount is subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications.