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In 2009, (or earlier tax years) only taxpayers with modified adjusted gross income (MAGI) of $100,000 or less could convert amounts in a traditional IRA to a Roth IRA (and married persons filing separately could not make such rollovers at all). However, in 2010 and later tax years, the $100,000 modified AGI limit on conversions to Roth IRAs will be eliminated (and married taxpayers filing separately will be able to make rollovers to Roth IRAs).
Beginning this year, you are able to roll over amounts in qualified employer sponsored retirement plan accounts, such as 401(k)s and profit sharing plans, and regular IRAs, into Roth IRAs, regardless of your adjusted gross income (AGI).
What's so attractive about a Roth IRA? Here's a summary:
The catch, and it's a big one, is that the conversion amount is fully taxable, 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) and the earnings on those pre-tax dollars. For example, if you are in the 28% federal tax bracket and roll over $100,000 from a regular IRA funded entirely with deductible dollars to a Roth IRA, you'll owe $28,000 of tax. So you'll be paying tax now for the future privilege of tax-free withdrawals, and freedom from the RMD rules.
Should you consider making the rollover to a Roth IRA? The answer may be “yes” if:
You also should know that Roth conversions made in 2010 represent a novel tax deferral opportunity. If you make a rollover to a Roth IRA in 2010, the tax that you'll owe as a result of the rollover will be payable half in 2011 and half in 2012, unless you elect to pay the entire tax bill in 2010.
Why on earth would you choose to pay a tax bill in 2010 instead of deferring it to 2011 and 2012? Keep in mind that absent Congressional action, after 2010 the tax brackets above the 15% bracket will revert to their higher pre-2001 levels. That means the top four brackets will be 39.6%, 36%, 31%, and 28%, instead of the current top four brackets of 35%, 33%, 28%, and 25%. The Administration has proposed to increase taxes only for those making $250,000, but it is difficult to predict who will get hit by higher rates. What's more, there's a health reform proposal before the House of Representatives right now that would help finance healthcare reform with a surtax on higher-income individuals.
So if you believe there's a strong chance your tax rates will go up after 2010, you may want to consider paying the tax on the Roth rollover in 2010.
Here are some ways individuals can prepare now for this year's rollover opportunity.
This discussion is not intended as tax advice. The determination of how the tax laws affect a taxpayer is dependent on the taxpayer's particular situation. A taxpayer may be affected by exceptions to the general rules and by other laws not discussed here. Taxpayers are encouraged to seek help from a competent tax professional for advice about the a proper application of the laws to their situation.
The materials created through August 2011 are when the professionals of Summit Financial were with Ogilvie Security Advisors Corp. The professionals of Summit Financial have not been with Ogilvie Security Advisors Corp. since August 31, 2011 and have no further affiliation with that organization.