ROTH IRA CONVERSIONS
Under a change in the IRS regulations, the IRS is allowing individuals to rollover Regular IRA's into Roth IRA's up until December 31, 2010. The conversions will cause the taxpayer to show the rollover amount as income and to be taxed on that income in 2010, or prorated 50% to 2011, and 50% to 2012. The change applies to all individuals regardless of their level of income. Previously, individuals were only allowed to convert their IRA's to Roth IRA's if their adjusted gross income was under $ 100,000.00.
This conversion is not new. Taxpayers with income under $ 100,000.00 could do the rollover in previous years. The new regulation just opened the rollovers to higher income taxpayers. Many investment firms are now recommending the rollovers to their clients without properly judging the tax and investment implications. Our office has been calculating the tax effect of the rollovers for many of our clients over the past year, and we have come up with some interesting questions. Where the money comes from for the upfront payment of the federal income taxes on the rollover amount makes the strategy less advantageous to a taxpayer in a high tax bracket in
2010. The uncertainty of the 2011 and 2012 tax rates makes the deferral of the taxes to those years questionable. The sustainability of the Roth IRA exemption from future taxes in an era of large federal deficits makes the question even more confounding.
Conversely, a taxpayer who will be in a low tax bracket in 2010, and has assets in a Regular IRA should look carefully at the strategy. If you can convert money from your Regular IRA to a Roth
IRA and have a fixed 2010 tax rate of 15% or below, there is a good possibility that the rollover will payoff for you even over a short period of time.
There are many other differences between the Roth and Regular IRA that need to be factored in to your decision. State bankruptcy laws, creditor protection, and the presence of non-deductible
IRA contributions will also affect your decision to rollover your funds.
Before converting any IRA to a Roth IRA, be sure to carefully review all of the variables that affect the transaction.