2010 Traditional IRA to Roth IRA Conversion Tax Rules

2010 Roth IRA Conversion Event is just around the corner.  Here are the tax rules if you are considering the conversion.

2010 is literally just around the corner- where did 2009 go?  As the new year approaches I keep getting more inquiries about the 2010 Roth IRA Conversion Event and more specifically what are the tax rules and implications of doing the conversion from a traditional IRA to a Roth IRA.  To help illustrate how the conversion could impact you tax wise, I thought it would be easiest to share some examples.  Before we get into the nitty gritty, let’s recap how the tax exactly works next year.
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Gone Daddy Gone – AGI Restriction For Roth IRA Conversion

In 1982 the Violent Femmes released the title track to their debut album “Gone Daddy Gone” that went on to be an epic album.   Almost just an epic event is the lifting of the $100,000 AGI (Adjusted Gross Income) restriction for individual or couples that are looking to do a Roth IRA Conversion.   As it stands right now, for any tax payer no matter your filing status, you are unable to do a conversion if you exceed this limit.  Most everybody knows (if not, then you know now) that in 2010 these restrictions are lifted and anyone and their brother will be able to do the Roth Conversion.  If this applies to you, here are some tips to get you prepared for the Roth IRA Conversion event when the restrictions are officially “gone daddy gone”.

2010 the AGI Limits for Roth IRA Conversion are "Gone Daddy Gone"

2010 the AGI Limits are "Gone Daddy Gone"

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7 Things To Know About The 2010 Roth IRA Conversion Rules

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.

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Roth IRA- Time To Convert Your Traditional IRA’s and 401k’s?

The 2010 Roth IRA Conversion event can’t get here soon enough.  As you may know, this is the time that anybody will be able to convert their traditional IRA’s to Roth IRA’s no matter your income level.  But currently as it stands now, if you make over $100,000 AGI Married Filing Jointly, your left counting the days until you are allowed to do so.

Common Misconception on Converting

A few people I’ve talked with thought that everybody had to wait to convert until 2010.  This is not the case. In fact, for many of you that have been contemplating whether to convert your former traditional IRA to a Roth IRA, now might be the year to do it.  With the recent decline in the market for 2008, chances are you’ve seen your investment accounts drop in significant value.  If you have a traditional IRA or a 401(k) at a previous employer, this might be the opportunity to convert that into a Roth IRA.

Why Is This A Good Time To Convert to a Roth IRA?

Reason being, when you convert to a Roth IRA, you have to pay the ordinary income tax on the converted amount.   By converting this year, your IRA’s have most likely dropped significantly and you will then have less to pay ordinary income tax with.  Sure it’s not exciting to see your account drop 30-40%, but if you could sock that away in a Roth IRA, think of all the tax free money down the road……woo-hoo! [Read more…]