IRA Rollover Opportunity Beginning In 2010

In 2009, only taxpayers with modified adjusted gross income (MAGI) of $100,000 or less may convert a regular IRA to a Roth IRA. However, beginning in 2010, the $100,000 MAGI limit on conversions to Roth IRAs will be eliminated, and taxpayers may roll over amounts in qualified employer sponsored retirement plan accounts, such as 401(k)s and profit sharing plans, as well as regular IRAs, into Roth IRAs regardless of adjusted gross income.

Why is a Roth IRA attractive? Benefits include:

Earnings within the Roth IRA are tax-deferred in the same manner as a regular qualified plan. Unlike a regular qualified plan, distributions from a Roth IRA generally are not subject to income tax. A Roth IRA owner does not have to begin lifetime required minimum distributions (RMDs) after he or she reaches age 70 ½ as is the case with regular qualified plans. Beneficiaries of Roth IRAs withdraw earnings tax-free. Upon conversion from a regular qualified plan to a Roth IRA, the rollover will be fully taxed. If you make a rollover to a Roth IRA in 2010, you may elect to pay half of the income tax due in 2011 and half in 2012 – or you may elect to pay the entire amount in 2010. You will be paying tax now for the future privilege of tax-free distributions and no required distributions. Why pay all of the income tax in 2010? Absent Congressional action, for calendar years after 2010, income tax rates will revert to levels in place prior to the 2001 Tax Act. In other words, the top four tax brackets could go back to 39.6%, 36%, 31%, and 28%, instead of the current 35%, 33%, 28%, and 25% brackets.

Converting to a Roth IRA now and paying income tax next year or over the next two years, flies in the face of the adage, "defer, defer, defer." If you convert now, you will be bearing the income tax on retirement plan assets rather than your beneficiaries. When retirement accounts are subject to both estate AND income taxes, what your non-spouse beneficiaries actually receive may be cents on the dollar.

Whether or not you should consider a rollover to a Roth IRA depends on a number of factors, such as:

Can you pay the taxes on the rollover with funds from nonretirement accounts? If you use retirement plan funds to pay the income taxes, less will be available to accumulate tax-free within the account. Consider the investment return on regular plan assets versus the investment return on Roth IRA assets that may need to be liquidated to pay for the income taxes attributable to...