Roth IRA Expansion in 2010
The Roth IRA has many benefits, especially for families with larger estates. However, due to income limitations, many are disqualified from accessing a Roth IRA. Back in 2006, President Bush signed into law a new set of rules for Roth IRA conversions that occur in 2010. For many people, this may be the tax planning event of a lifetime. All taxpayers can take advantage of the Roth IRA of these new rules. Here is how:
1. Contributions to a Roth IRA – The ability to contribute to a Roth IRA starts to phase out for individuals that earn over $105,000 and for married couples that earn more than $166,000. If you fall in this category, you can still make a “back door” contribution to a Roth IRA in 2009 and 2010. You can do this by contributing up to $5,000 to a non-deductible traditional IRA. Then in 2010 you can convert this to a Roth IRA. (This is effective only if you are converting all your non-Roth IRA funds. You should consult your tax advisor for a detailed tax analysis.)
2. No income limits on conversion – In 2009, the income limits to convert to a Roth IRA is $100,000. In 2010, and for that year only, there are no income limits on converting your traditional IRA to a Roth IRA. (You can also convert a 401(k) from a previous employer.) This is a prime opportunity for high wage earners to have their retirement funds grow tax free.
3. Convert now – For those taxpayers with less than $100,000 in adjusted gross income, you can convert now. The market has depressed all account values, thus you will have less income on the conversion and consequently less taxes to pay on the conversion.
4. Pay taxes over time – If you convert your traditional IRA to a Roth in 2010, the new rules allow a payment plan. Half of the tax will be due in 2011 and the other half will be due in 2012. This is the equivalent of a tax free loan from the US Treasury. This benefit is only available for conversions done in 2010.
It is very likely that the US Government will be raising taxes in the future to pay for all the benefits it is currently providing. For those of you that want to avoid paying taxes in your retirement years, you should consider a Roth conversion in 2010.
