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Completely New Guidelines Suggest A Lot More Individuals Doing Roth IRA Conversions In 2010
As we near the end of 2010, countless people have already accomplished Roth IRA conversions, and plenty of others are questioning if a Roth IRA conversion in 2010 is the correct move for them.Why are Roth IRAs in the news so much this year? Previously, Roth IRA conversions were restricted to people who earned under a specific income limit ($100,000). A change in the rules, effective as of January 2010, removes the income limit which means much more individuals are allowed to to convert from normal IRAs to Roth IRAs.
Part of this new rule is the ability to pay the taxes from any conversions done in 2010 over a couple of years. Rather than having to pay the taxes from the conversion all on one tax return, the IRS is permitting you to pay off half in 2011 then half in 2012.
Even though the new policy may seem too good to pass up, you ought to take a look at the situation very carefully before jumping right into a Roth conversion in 2010. Just because you could convert to a Roth does not imply you should do a conversion, at least not right away.
Before you decide on whether to convert or not, listed here are a few basics about traditional and Roth IRAs you ought to be well aware of:
Traditional IRAs
- Cash put into traditional IRAs is tax deductible (income limits apply if you are covered by an employer sponsored retirement policy)
- Withdrawals from traditional IRAs are actually taxed at your ordinary income tax rate, so if you are in the 15% tax bracket you will pay off 15% on the amount withdrawn, in the event you're in the 28% tax bracket you'll pay off 28% on any distributions, etc.
- The IRS requires you to take a minimum amount out (based mostly on your age and the account balance) after age 70 1/2.
Roth IRAs
- Contributions to a Roth IRA are not tax deductible.
- You might not be allowed to contribute to a Roth IRA when your revenue is above the limits.
- Qualified withdrawals (must be at least age 59 1/2 and have had the Roth for no less than five years) aren't subject to income tax.
- Unlike traditional IRAs, you are not required to take cash out of your Roth IRA when you reach age 70 1/2
Should You Do a Roth Conversion?
You must consider converting to a Roth IRA if:
- You expect to be in exactly the same or higher tax bracket once you retire (or when you'll need the funds),
- You won't need the money you convert for 5 years or more, and
- You could afford to pay out the taxes on the conversion without dipping into your retirement savings.
It's imperative to note that just because you can convert to a Roth IRA doesn't suggest you should convert to one. You should check with a financial or tax expert to find out if a Roth IRA conversion is right for you, since every situation is completely different. A Roth conversion in 2010 might not make sense for you, but a conversion in future years might make sense if tax laws change or your situation changes.
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