Should You Convert to a Roth IRA? New Laws in 2010 Bring Opportunities to Consider.
Legislation changes in 2010 could mean opportunities for you to consider converting your traditional, SEP or SIMPLE IRA to a Roth IRA. With a little preparation, you and your Edward Jones financial advisor could determine that a Roth IRA is right for your retirement strategy.
Overview of Legislative Changes
- Currently, the modified adjusted gross income (MAGI) limit to convert is $100,000, if you’re married filing jointly or single. If you’re married and filing separately, you’re not currently eligible (in 2009) to convert a traditional IRA to a Roth IRA.
- In 2010, the $100,000 MAGI limit will be eliminated, which will allow anyone to convert. If you are married and filing separately, you will be eligible for conversion.
- A conversion is usually reported as income for the tax year the conversion takes place. However, in 2010 only, your conversion amount will be split and reported as income for tax years 2011 and 2012 unless you elect to report the entire conversion amount on your 2010 taxes.
- Due to the recent market declines, the value of your portfolio is likely down. If your income is within certain limits, the cost to convert your tax-deferred IRA (traditional, SEP or SIMPLE) to a Roth IRA also will likely be lower.
The Benefits of Converting to a Roth IRA
- You can have tax-free income in retirement.1
- There are no required minimum distributions (RMDs).
- You have access to the dollars you converted penalty free before age 59½.2
- Conversions are allowed after age 70½.
- You can create a tax-free legacy for your heirs.
Tax Considerations
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.
Contact your financial advisor today about steps to take for your specific situation.
1A 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.
2A 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.
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.
