Audit, Accounting and Tax Alerts
New 2010 IRA Conversion Rules
9/21/2009
During 2010 only, taxpayers, regardless of their income level, will be able to convert funds in regular IRAs (as well as qualified plans) to Roth IRAs, moving from a retirement vehicle that will be taxed upon withdrawal to one that will be tax-free. Before 2010, only taxpayers with modified adjusted gross income of $100,000 or less could convert to a Roth IRA. This new conversion option poses significant tax planning challenges and opportunities for 2009, 2010, and 2011.
Who should consider making the regular IRA to Roth IRA conversion?
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Taxpayers who have a number of years to go before retirement, and are therefore able to recoup the dollars that are lost to taxes due to the conversion;
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Taxpayers who anticipate being taxed in a higher bracket in the future than they are now; or,
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Taxpayers who can pay the tax on the conversion from non-retirement-account assets, allowing their entire retirement investment to continue to grow tax-free.
Taxpayers should consider a regular IRA to Roth IRA conversion because Roth IRAs have two major advantages over regular IRAs:
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Distributions from regular IRAs are taxed as ordinary income whereas Roth IRA distributions are tax-free if they are qualified distributions; and,
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Regular IRAs are subject to the lifetime required minimum distribution (RMD) rules that generally require annual distributions in the years after the IRA owner reaches age 70 ½. Roth IRAs do not have such RMD requirements which would allow more funds to be transferred to heirs.
The amounts converted to a Roth IRA will be taxed, but taxpayers can choose one of two timeframes for reporting income: (1) either solely in 2010 or (2) split evenly between tax years 2011 and 2012, with none taxed in 2010, the year of conversion. The variable in making this choice is the tax-rate picture after 2010. Absent Congressional action, the top four tax brackets are scheduled to increase between 3%-4% each.
As we all have seen over the past weeks, tax rate increases for higher income individuals, along with healthcare reform, have been actively discussed by our leaders in Washington, but there is currently no definite resolution. For those that believe tax rates are on the rise, taxing the entire rollover in 2010 may be the best option, even though that goes against the normal tax strategy of deferring income into later years. You could, however, postpone deductions from 2009 or accelerate deductions from 2011 to help mitigate the increase in tax.
If you would like assistance in determining if this conversion would be beneficial for you, please contact Doug Yoakley or Heather Martin at (800) 270-9629. Planning in 2009 could save you tax dollars in the future.
WE ARE REQUIRED BY IRS CIRCULAR 230 TO INFORM YOU THAT THE FOLLOWING DISCUSSION WAS NOT INTENDED OR WRITTEN TO BE USED, AND IT CANNOT BE USED, NOR RELIED UPON, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING ANY PENALTIES THAT MAY BE IMPOSED UNDER FEDERAL TAX LAW. THE ADVICE WAS WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE TRANSACTIONS OR MATTERS ADDRESSED IN THE DISCUSSION. EACH TAXPAYER SHOULD SEEKADVICE BASED ON ITS PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.