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2010 Conversion to a Roth IRA

Effective January 1, 2010, anyone can convert a traditional, SIMPLE or SEP IRA to a Roth IRA or do a direct rollover from a defined contribution plan account to a Roth IRA.  The earnings limit for IRA conversion has been eliminated.

Money in a Roth IRA can grow tax-free and can be withdrawn tax-free at retirement.  You also don’t have to worry about taking Required Minimum Distributions (RMDs) when you reach age 70 1/2 , as you do with your traditional IRA.

You will have to pay income taxes on some or all of the converted amount.  If you convert in 2010, you can spread the federal taxes on the conversion over 2011 and 2012.

Q:  Which assets are eligible for conversion to a Roth IRA?

Assets that are eligible for conversion include:

• traditional deductible or nondeductible IRAs
• SEP IRAs
• SIMPLE IRAs (There is a two-year holding period before you can convert.  Otherwise, a 25% early withdrawal penalty may apply).

You can also convert eligible distributions from the following qualifying employer-sponsored retirement plans: 

• 401(k)
• money purchase
• profit-sharing
• 403(b)
• governmental 457(b) and 403(b)

Q:  Can I convert RMDs from a traditional IRA?

NO.  However, if you are  required to take RMDs (required minimum distributions) in 2010 or later years, you can convert all or a portion of your traditional IRA balance as long as the current year’s RMD was distributed first.

Q:  Can I convert an inherited IRA to a Roth IRA?

NO.  Current law does not permit the conversion of an inherited IRA to a Roth IRA.
   
Q:  Why convert a traditional IRA to a Roth IRA?

The main reasons you may want to convert are:

• To withdraw earnings tax-free. Distributions from a Roth IRA are tax-free if taken at least five years after the initial contribution or latest conversion and you are at least 59 ½.  Other exceptions may also allow tax-free withdrawal before you reach 59 ½. 
• To avoid taking RMDs after age 70-1/2.  Required Minimum Distributions (RMDs) are not required on Roth IRAs during your lifetime.  
•  To use the Roth IRA as a wealth-transfer vehicle.  Roth IRA beneficiaries will generally receive the money from a Roth IRA free from income taxes, but they must begin taking RMDs after the Roth IRA owner’s death.

Q:  Are there tax consequences from converting to a Roth IRA? 

 YES.  If you convert your traditional IRA, you will have to pay income tax on the portion of the conversion that has not been previously taxed.

Q:  Does it matter if I have more than one traditional IRA?

YES.  If you have more than one traditional IRA, you will have to factor all of your traditional IRAs, SEP and SIMPLE IRAs into the calculation — even if you are only converting one of them — to determine how much of the conversion amount will be taxable.

Q:   Do I have to report the taxable amount of a conversion when I file my tax returns? 

YES.  You have to report the taxable amount of your conversion and pay the related taxes when you file your tax return for the year in which you convert.
However, Congress has approved a special rule for conversions that are completed in 2010 ONLY:  You can either report the income when you file your 2010 tax return, or you can wait and report half of it on your  2011 tax return and the other half on your 2012 tax return.

Q:   Can I convert only a portion of my traditional IRA? 

YES.  The conversion does not have to be an all-or-nothing event.  You can convert a portion of your traditional IRA in one tax year and then convert more or the remainder of the IRA in a subsequent tax year.

Q:  Can I convert a traditional IRA to a Roth IRA every year?
 

YES, unless the current tax law changes.

Q: What if I change my mind after the conversion? 

A conversion to a Roth IRA can be undone (recharacterized) for any reason. You have until your tax-filing deadlines (including extensions) in the year you convert to a Roth IRA to undo your conversion. 

Q:  After recharacterizing from a Roth IRA, Can I convert back to Roth IRA again?

YES.  You can convert a recharacterized IRA back to a Roth IRA, but you must wait until:

• The beginning of the new tax year following the tax year in which you recharacterized, or
• A minimum of 30 days after the recharacterization is completed, whichever is later.
      

Q:  Should I consult my tax adviser? 

YES. IRA conversion rules and tax calculations can be complicated, and state income-tax rules for conversions may differ from federal rules. A misstep could result in unforeseen income taxes or penalties.  We encourage you to discuss conversion options with a qualified tax advisor.