2010 rings in new Roth IRA opportunity
Starting in 2010, investors with a modified adjusted gross income of more than $100,000 will — for the first time — be able to convert their traditional IRA to a Roth IRA. And, in 2010 only, all investors can defer any
federal taxes due on the conversion for a year and spread the payments equally over the next two tax years.

Roth IRA rules and strategies change
Prior to 2010, IRS rules barred all single and joint filers with a modified adjusted gross income (MAGI) of more than $100,000 from converting their traditional IRA to a Roth IRA. Effective January 1, 2010, there is no earnings limit, thanks to the Tax Increase Prevention and Reconciliation Act of 2005. That could be very good news, especially for investors whose earnings still prevent them from contributing to a Roth IRA.

Going forward, these investors could contribute each year to a nondeductible traditional IRA, which has no income limits, and then convert the account to a Roth IRA. Incidentally, investors can change their mind after the conversion.
The reversal, known as a recharacterization, simply must be completed before the tax filing deadline in the same year in which the conversion was performed.

Conversions are taxable events
If investors convert their traditional IRA, they’ll likely have to pay income taxes on some or all of the conversion amount — contributions and earnings in the traditional IRA that have not yet been taxed — whether the money goes into an existing or new Roth IRA.

However, to help ease the tax pain, Congress has approved a special rule for conversions that are completed in 2010 only — investors can choose to pay half of the taxes when they file their 2011 tax return and the other half when they file their 2012 tax return.

If investors have more than one traditional IRA, they’ll have to factor all of their own (not a spouse’s) traditional IRAs, SEP and SIMPLE IRAs in the calculation — even if they are only converting one of them — to determine how much of the conversion amount will be taxable. (For more information, see IRS Form 8606.)

The benefits of a Roth IRA

Tax-free withdrawals — Distributions are tax-free if taken at least five years after the initial contribution or latest conversion and the investor is at least age 59½ or is disabled or uses the money for a first-home purchase ($10,000 lifetime limit). Also, upon the Roth IRA owner’s death, withdrawals by the beneficiary are generally tax-free.
Tax diversification — If investors have taxfree accounts (such as a Roth IRA) and tax-deferred accounts (such as a 401(k) plan or a traditional IRA), they’ll have the income flexibility they may need during retirement as their tax rate rises or falls.
No required minimum distributions (RMDs) — Roth IRA owners do not have to take RMDs during their lifetime.
Estate planning — Beneficiaries will receive the money from a Roth IRA income-tax-free but must begin taking RMDs after the death of the Roth IRA owner.