Remember when 2010 seemed like light years away? 2010 is here! We’re one month into 2010 and pretty soon will be seeing the ball drop again. 2010 brings a lot of uncertainty within the financial realm with estate planning and sunset provisions in question.
One thing that is certain pertains to the Roth IRA. The 2010 Roth IRA conversion is just here. Many still are left confused about the rules and not completely certain of what the conversion really means to them. Whether you are looking to convert Traditional IRA’s or 401k’s, here is a look at seven things that you need to know about the 2010 Roth IRA conversion rules.
Reminder: Deadline for converting 401k’s and Traditional IRA’s is December 31st!
If this article was helpful, you may also want to check out these posts as well: 7 Things You Need to Know About the Roth IRA for 2010, Roth IRA Conversion Tax Rules, Can You Undo a Roth IRA Conversion?
1. Rules on Income Limits.
Whether you are filing as an individual or married filing joint, the adjusted gross income level of $100,000 will become nonexistent for the Roth IRA conversions of 2010. For higher wage earners, this is a prime opportunity to convert money into the Roth IRA to allow your money to have tax-free growth at retirement.
2. You don’t have to wait until 2010.
For wage earners that make less than $100,000 adjusted gross income, you can actually convert now. With the market being down what it is this might be an excellent time to convert since you will be paying less income tax on the lower account value. By waiting until 2010, and if you are able, you may be having to pay a higher tax bill with market appreciation. If you convert too soon, you can always do an IRA recharacterization by October 15th of year you convert.
3. 2010 is the year but not the year the tax is due.
While 2010 is the actual year that you will be able to convert, the income to be claimed can be deferred until 2011 and 2012. Expecting a vast majority to take advantage of this, the IRS has set up special provision on how the tax will be paid. The IRS has granted you the option to claim 50% of the conversion amount as income in 2011 and the remaining 50% in 2012. Keep in mind that this is only in 2010. After 2010 the taxes will all be paid in full the following year going forward.
If you elect to pay the tax over the two year period, keep in mind that the tax rate is determined for that year only. Example, in 2011 you will pay the tax based on your tax bracket for that year. If your income were to somehow sky rocket in 2012, then you will be paying more in taxes that year for the conversion.
What if husband and wife want to convert? Each IRA(s) is tied directly to the Social Security number of the account owner. What that means is that if a husband wants to convert his IRA’s and the wife does not, that’s okay. Further more, if both want to convert, then the husband can choose the two year option on paying the tax and the wife could choose to pay her tax in 2010 (or vice versa). Remember that you have to do one or another. For example, if the husband has multiple IRA’s that he is looking to convert, he can’t choose to pay the tax this year on one IRA, then defer the other IRA for 2011 and 2012.
