After Business Planning

Taxpayers with adjusted gross incomes over $100,000 have had to sit on the sidelines when it comes to converting their traditional IRA to a Roth IRA. But a provision from a 2006 tax law goes into effect January 1, 2010, repealing the income limit for converting to a Roth. 

Why would you want to convert? A major attraction of Roth IRAs is that distributions are tax-free, provided you meet the age and holding period rules. And there are no required annual distributions once you reach age 70½. In contrast, you’ll generally pay tax at ordinary income rates on distributions from a traditional IRA.

With a Roth IRA, you can enjoy tax-free growth and distributions whenever you want throughout your retirement years, or you can leave the Roth for heirs to receive tax-free distributions.

When a taxpayer converts a traditional deductible IRA to a Roth IRA, the amount converted is added to taxable income and is taxed at ordinary income rates. There is a special incentive to do a Roth conversion next year.

If you convert in 2010, you can report half of the income on your 2011 tax return and the remaining half on your 2012 tax return. If you choose, you can report all of the conversion income on your 2010 return.

It’s important to weigh the pros and cons of a Roth.