Educational Articles

IRA Investors Have a Window of Opportunity to Convert to a Roth


Many hard-working subscribers and investors are now feeling the aftershock of the major decline in stock prices, the recession, and all related consequences.  When such events occur, we all have a tendency to be frozen into a state of inaction, not knowing if anything we do will be a good decision.

The federal government, as part of the Tax Increase Prevention and Reconciliation Act of 2005, permanently eliminated the $100,000 limit for Roth conversions, starting January 1, 2010.  This change, combined with the recent decline in stock prices, has given many subscribers a chance to convert to a Roth account, and with less tax owed on conversion than if stocks were at higher levels. 

Many subscribers and investors have been prevented from opening Roth accounts due to high current income. These income limits for opening a Roth will still remain after January 1, 2010.

When an individual converts to a Roth, it is not an all-or-nothing conversion. Tax planners suggest that the tax liability incurred from the conversion be such that it does not put you in a higher tax bracket. If you do convert part of your IRA to a Roth in 2010, you have the choice of reporting the amount you convert on your 2010 tax return, or, you can spread the amount converted in equal amounts across two years. This allows you time to gather the money needed to pay the tax for this conversion. Right now, this is a one-time option for 2010 conversions.

If you’re now over the limits for contributing to a Roth, you can still open a traditional IRA, contribute the maximum allowed ($5,000 for most, but $6,000 in 2009 for individuals that are 50 or older), and convert to a Roth next year.

Once you have a Roth IRA, you have several advantages. Withdrawals are tax-free as long as you’ve held the Roth for a minimum of five years and you are at least age 59 1/2. Second, there are no required withdrawals as there are with a regular IRA. Third, and this may be very important to some subscribers, your heirs won’t owe income tax on withdrawals. However, Roth beneficiaries must take withdrawals based on their life expectancies. Also, Roth assets are included in an estate’s value.