< Back to Front Page Text size – +

Roth conversion basics

Posted by Cheryl Costa September 23, 2008 10:10 AM

What are the rules for converting a traditional IRA to a Roth IRA? Are there any strategies to avoid paying or reducing the immediate tax bite?

In order to convert a traditional IRA to a Roth IRA in 2008 or 2009, your modified adjusted gross income (MAGI) must not exceed $100,000.

These rules change in 2010 when the $100,000 limit is lifted and you will be able to do a conversion regardless of your income. Of course, any amount that you convert will be subject to income taxes. However, there is another "bonus" arriving in 2010 -- if you do a conversion in that year, it is assumed that you are not paying the taxes until you file your 2011 and 2012 returns. That means that actual payment will not occur until 2012 and 2013.

The surprising thing is that the government actually wants you to do it that way. If you want to pay the taxes due in the year of conversion, you need to specifically elect that treatment on your tax return. While it might seem that the government is being especially nice, many suspect an ulterior motive -- higher tax rates are expected to be in effect in those years. So, it just might make sense to do the conversion in 2010 and pay the taxes right away. If you think you might do a conversion in 2010, it might be a good idea to start saving money to cover the tax bill.

  • CommentComment
  • EmailEmail
« Back to Front Page
ABOUT MANAGING YOUR MONEY
Local finance professionals share insights and advice on issues such as budgeting, managing debt, and retirement planning.
see all globe blogs

About the contributors

Jill Boynton is co-founder of Cornerstone Financial Planning in Newington, N.H. Along with traditional financial planning services, Boynton provides analysis specifically for divorce.
Andrew Chan is the founder of Integrative Financial Advisors in Framingham. He provides comprehensive financial planning advice and investment management services. He has been an adviser for over 12 years and works with clients to integrate all aspects of their finances including investments, retirement, education funding, and tax planning.
Cheryl Costa is a managing director at AFW Wealth Advisors, which has offices in Natick and Purchase, N.Y. She advises clients on investing, education funding, and estate planning. She holds a master’s in business administration from Boston University.
Jamie Downey has been an accountant for more than 14 years. He's a partner at Downey & Co. in Braintree. Prior to joining the firm, he served as a manager in the audit department of accounting firm KPMG.

E-mail your question

Name:
E-mail:
Your question/comment:
archives

Related Links