Roth IRA Conversions
If your income is within certain limits, you may be eligible to convert your tax-deferred IRA (traditional, SEP or SIMPLE) to a Roth IRA.
What are the benefits of converting to a Roth IRA?
With a converted Roth IRA:
- You can have tax-free income in retirement – which means you don't
- have to worry about future income tax rates
- There are no required minimum distributions (RMDs)
- You have access to the dollars you converted penalty-free before age 59½*
- Conversions are allowed after age 70½
- You can create a tax-free legacy for your heirs
Tax Considerations
It’s important to note that your income tax liability on a conversion is based on the value of investments held in your IRA when you convert to a Roth IRA. The amount you convert will be included in your taxable income in the year you convert.
Converting your tax-deferred IRA to a Roth IRA is not an all-or-nothing decision — converting a portion of your IRA is also a strategy to consider.
Earnings distributions from a Roth IRA may be subject to taxes and a 10% penalty if the account is less than five years old and the owner is under age 59½.
Decision Factors
There are various factors that may play into your decision to convert, so keep your end goal in mind. A few key decision factors include the following:
- Will you be able to afford the taxes due?
- What is your tax rate now and in the future?
- When do you need to make withdrawals?
- Do you have a desire to leave a tax-free IRA to your heirs?
Please note: Currently, the modified adjusted gross income (MAGI) limit to convert is $100,000 if you are married filing jointly or single. If you are married and filing separately, you are not currently eligible.
2010 IRA Conversion Changes
With the signing of the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), the following changes have been implemented for Roth IRA conversions:
- In 2010 the $100,000 MAGI limit will be eliminated, which will allow anyone to convert. If you convert in 2010 only, you will also have the option to spread your income tax liability over two years (2011 and 2012) in equal installments. This is something to be aware of and prepare for.
- Conversions will be available to IRA holders who are married and filing a separate return.
You, your financial advisor and a tax professional can help determine a strategy that best suits your particular situation.
A five-year holding period applies to each conversion. Conversion dollars distributed from a Roth IRA may be subject to a 10% penalty if the client has not satisfied the five-year holding period for the conversion and is under age 59½. A five-year holding period also applies to earnings. Earnings distributed from a Roth IRA may be subject to income tax and a 10% penalty if the client has not satisfied the five-year holding period and is under age 59½. Congress has passed legislation to eliminate RMDs for 2009 only. You are still required to receive RMDs in years beyond 2009.
Edward Jones, its employees and financial advisors do not provide tax or legal advice. You should review your specific situation with your tax advisor or legal professional for information regarding, or issues concerning, the tax implications of making a particular investment or taking any other action.
