A Good Time to Consider a Roth IRA Conversion

For those of you with traditional IRAs, this may be a good time to consider rolling over all or part of your IRA assets into a Roth IRA. Of course, this is a decision we would like to help you with, and it is something many of our clients should consider due to some important rule changes. The most important is that starting in 2010, the $100,000 modified adjusted gross income (MAGI) limit has disappeared. This means that everyone can now enjoy the benefits of a rollover previously limited to those with a MAGI under $100,000.

Benefits of a Roth IRA:

1. Earnings within the account are tax-sheltered
2. Unlike a traditional IRA, withdrawals from a Roth IRA aren’t taxed if some relatively liberal conditions are satisfied
3. A Roth IRA owner does not have to commence lifetime required minimum distributions (RMDs) after he or she reaches age 70 1/2 as is generally the case with traditional IRAs
4. Beneficiaries of Roth IRAs also enjoy tax-sheltered earnings and tax-free withdrawals

A Roth conversion is treated as a taxable distribution which will result in a current tax obligation. However, the current tax may be offset by factors that make rolling over to a Roth IRA potentially desirable:

1. Your traditional IRA has dropped in value due to poor performance of investments
2. You expect higher income or tax rates in the future as your income grows and/or tax laws change
3. The long term benefits of tax free growth in the account

Keep in mind that if you do decide to convert to a Roth IRA the rollover will be fully taxed, assuming the rollover is being made with pre-tax dollars (money that was deductible when contributed to an IRA, or money that wasn’t taxed to an employee when contributed to the qualified employer sponsored retirement plan). You have the option of reporting the rollover income all in 2010 or split over 2011 and 2012. This election is also separately available for federal and California tax purposes.

After the conversion, your Roth IRA can build up income tax-free. You will eventually be able to take tax-free withdrawals after age 59 ½ when your marginal tax rate may be higher than it is now. And there is a safety net built in if the move to a Roth IRA doesn’t work out because of changing circumstances. You have until October 15 of the year following the conversion to reverse it back to a traditional IRA.

You may benefit from a switch to a Roth IRA. However, there are a number of variables to consider and we encourage you to discuss with us how such a conversion impacts your specific situation.