There are several rules that govern your ability to do an IRA to Roth IRA conversion as well as contribute to a Roth IRA today.
Rules for 2010:
- For years before 2010, if your modified adjusted gross income is greater than $100,000, you can't convert a regular IRA to a Roth IRA.
- If your adjusted gross income is above $150,000 and married filing jointly (MFJ), your are limited to what you can contribute as new money to a Roth IRA. Above $160,000 and MFJ, you are not allowed to contribute to a Roth IRA. For single taxpayers, the limits start at $95,000.
- If you inherited an IRA from someone other than your spouse, you cannot convert it to a Roth IRA.
- For those filing as married filing separately, you are not qualified to do a conversion to a Roth IRA.
- Required minimum distributions (for those over 70 ? and for those who inherited IRAs) and the converted amounts are not included in the income limitations above.
The Tax Increase Prevention and Reconciliation Act, passed in May 2006, changed the above rules significantly, giving you an opportunity to convert IRAs to Roth IRAs regardless of your income.
Strategies Needed to Get to 2010:
- Applies to all taxpayers, regardless of filing status or income level.
- For conversions that occur in 2010, there is a special rule that allows the income from the conversion to be reported in equal installments in 2011 and 2012 (years when the tax rates are scheduled to increase over 2010 rates).
- If not converting the entire amounts you have in IRAs, you have to figure out the total value of all IRAs and the amount that is subject to tax and the amount not subject to tax (after-tax contributions to an IRA in earlier years).
Advantages of Doing an IRA to Roth IRA conversion:
- Beginning in 2006 (you have until April 16, 2007 to contribute for 2006), contribute the maximum amount allowed to a Traditional IRA for you and your spouse. The limit is $4,000 each for all taxpayers and $5,000 for those who are over 49 who have earned income. This assumes you are not eligible to contribute to a Roth IRA due to income limitations.
- Continue to contribute to a Traditional IRA in 2007 to 2010, each year contributing the maximum allowed for each person based on earned income.
- Build up a taxable investment pool of money to be able to pay the additional state and federal income tax on the converted amount. This enables you to convert all the IRA amounts without using the IRA money to pay the tax amount.
- A Roth IRA in the future is more valuable to you than an IRA/401(k)/403(b) will be because the same amount of money will provide greater purchasing power. The IRA/401(K)/403(b) will be reduced by the tax burden, while the Roth IRA will be tax-free on the future growth in value.
- The Roth IRA, under current law, does not require minimum distributions at age 70 ? like the IRA/401(k) rules require. At age 70 ?, you will be required to withdraw 3.96% of the value of all IRA/401(k)/403(b)s at that time even if you do not need that amount to meet living expenses. The amount withdrawn will be taxable income on top of your pension, social security and other income on your tax return.
- The amount you paid in income tax from the conversion will help reduce your taxable estate value, which could save estate taxes for your heirs if your estate would be subject to such taxes.
- By planning when to convert and how much can assist you in managing your income tax liability by paying the tax when your rates are lower.
- Once you have passed the five year waiting period on Roth conversion amounts, you are able to access the amount without a penalty for early withdrawal if you are under age 59 ?.
Are You One of the Select Few Who Prefers to Take Charge?
Find the Right Financial Advisor for You
WiserAdvisor has over 20 years experience in successfully matching interested investors to financial advisors and is a trusted source in this field.
Matched Advisors are screened for experience, fee schedules, registered with FINRA and SEC and hold clean records
Free Initial Consultation. No Match Fees. No Obligation