by Richard S Schwartz, CPA, CVA

Beginning in 2010, taxpayers with incomes exceeding $100,000 finally have the opportunity to convert their traditional IRAs and other qualified retirement accounts into a Roth IRA. What makes the decision to convert so appealing are some of the unique benefits available to Roth IRA’s, including:

  • Tax-free growth
  • No Required Minimum Distributions starting at age 70 ½
  • No income taxation to your beneficiaries on withdrawals from inherited Roth IRA’s

As part of your decision to convert existing IRAs to a Roth IRA, you need to weigh the pros and cons. Some reasons influencing a decision to convert to a Roth IRA include the following:

  • You anticipate higher tax rates in the future.
  • You have a long investment time frame.
  • While your retirement investments have declined in value due to last year’s market      correction, you anticipate them to rebound at some point before you retire.
  • You prefer delaying retirement distributions as long as possible and would like to avoid      taking withdrawals upon reaching age 70.5.
  • You have money available to pay the taxes due on this conversion.
  • You hope to leave your beneficiaries a tax-free gift.
  • The majority of your IRA’s are comprised of post-tax contributions, resulting in a minimal tax from your conversion.

Conversely, the primary reasons influencing a decision not to convert to a Roth IRA include the following:

  • You do not believe in prepaying income taxes given uncertainty about the tax code, future tax rates and other tax legislation.
  • You have a large amount of money in a rollover IRA, SEP IRA or SIMPLE IRA which would result in a sizeable tax burden on each IRA dollar converted.
  • You are unsure that the IRS will continue to allow qualified distributions from Roth IRAs to be tax-free in the future.
  • You will need to withdraw money from your converted Roth account to pay taxes due on the conversion.

There is one additional item to consider for 2010 conversions only. Under the current rules, you can elected to either report 100% of the taxable income on your 2010 tax returns or claim 50% of the conversion amount as taxable in 2011 and then claim the remaining 50% in 2012. Don’t forget that rates may be on the way up in 2011, however, since the tax cuts enacted as part of the 2001 Tax Act are set to sunset at the end of 2010.

If you have existing IRAs (traditional IRAs, rollover IRAs, SEP-IRAs, SIMPLE IRAs) and/or 401(k) or 403(b) accounts held with a former employer and are considering converting some or all of those funds to a Roth IRA, please contact one of theMDTAXES CPAs to help you work through a detailed analysis prior to making your final decision. A small amount of planning may result in a large amount of tax savings.

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