Roth IRA Conversions are HOT for 2010, but are they for Everyone? 

 Roth IRAs are a retirement plan that allows you to save money for retirement, similar to a traditional IRA. But, unlike traditional IRAs, the Roth IRA provides no federal income tax deduction for contributions. However, it does provide benefits that aren't found in any other retirement plan: Tax-Free withdrawal of all earnings and principal. Similar to traditional IRAs there are earned income requirements, age and Adjusted Gross Income (AGI) limits for contributions. In addition, there are possible tax penalties for distributions to participants under the age of 59 ½, or if the account is not held for at least five (5) years, but there are exceptions. Another important distinction is that a Roth IRA is exempt from the required mandatory distributions at age 70 1/2 and may be passed to your heirs income tax free.

Contribution Limits

To contribute to a Roth IRA in 2010, your (AGI) must be less than $177,000 for married filing joint, $10,000 for married filing separate/living with spouse, or $120,000 for taxpayers who are single, head of household, or married/not living with spouse.

Roth IRA Conversions

To convert your existing IRAs to a Roth IRA before 2010, your AGI (for single or married couples) could not exceed $100,000. As of 2010, this income limitation has been lifted and everyone can make the conversion. Anyone willing to pay the taxes on the amount converted that has not already been taxed, that is. Unless an election is made to tax the conversion in 2010, the taxable amount is divided between years 2011 and 2012 as ordinary income, taxed at the current rates for those years. For California residents, this special tax allocation also applies. Tax planning is critical due to the high potential tax implications of a Roth IRA Conversion, therefore I strongly recommend you contact a tax professional before you begin the process.

Re-Conversions

When it comes to converting, timing can be everything. The actual day that you convert is the value that is used to determine how much tax you will owe. The IRS does allow you to do a recharacterization, but doing so will prevent you from doing another conversion in that year. Many people who converted early in 2008 recharacterized when the markets began to tank in the fall. If you do decide you want to implement the “take back”, keep in mind that you have until October 15th (maximum tax filing deadline with extensions) of the calendar year following conversion to switch back to a traditional IRA.

For more information on the differences between a Roth IRA and Traditional IRA (deductible or non-deductible) and how it may, or may not, fit your investment objectives, please do not hesitate to give me a call. Remember, when it comes to your retirement, it’s what you keep that can make, or break, the bottom line.

For more information, please contact:

Nadine M Lord EA CFP

National Planning Corporation

30021 Tomas, Suite 300, Rancho Santa Margarita CA 92688

Ph:  949-766-7808    Toll Free 800-350-1299

nadine.lord@natplan.com