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Virtually anyone can take advantage of this tax law loophole.
2010 will be an extraordinary year for tax law, a tax year so potentially advantageous that we may never see its like again. One probable 2010 phenomenon: a wave of high-income and high net worth individuals converting traditional IRAs to Roth IRAs. Here’s why 2010 represents a great year to make that move.
Income limits: gone.
Today, you have to pass an income test before you can convert a traditional IRA to a Roth. If your modified adjusted gross income (MAGI) is more than $100,000, you can’t do it. This limit has long frustrated high-income taxpayers.
In 2010, it’s a whole different story – there is NO income test. Anyone with any MAGI can make the conversion.
While you still can’t contribute to a Roth IRA if your 2007 MAGI exceeds $166,000 (joint filers) or $114,000 (most single filers), it is the conversion that is important.
Potential advantages: considerable.
Many high-salaried people have rolled old 401(k) assets from old jobs into traditional IRAs. In 2010, they can convert them to Roths, which will mean:
- Tax-free growth of these assets
- Tax-free withdrawals of these assets someday (assuming they are 59½ or older and the Roth IRA is more than 5 years old)
- No minimum distribution requirements once you turn 70½
- An eventual reduction in their taxable estate4
Taxes: deferred.
Of course, you will pay taxes on a Roth IRA conversion. But if you do this in 2010, you don’t have to pay them right away. Unless you elect otherwise, the taxes on the conversion will be spread out over the 2011 and 2012 tax years. In effect, this gives taxpayers the ability to delay full payment of any tax due until 2013.
The non-deductible IRA option.
Some high-income earners have opened non-deductible traditional IRAs with the intent of converting them to Roths in 2010.
While a traditional IRA has no contribution phase-outs due to income, high-income taxpayers can’t deduct their IRA contributions like the middle class can. For tax year 2007, for example, the deduction phase-outs (this is MAGI) start at $83,000 for joint filers and $52,000 for single filers and heads of households.
If you don’t qualify to make a deductible IRA contribution or a Roth contribution, the non-deductible IRA lets you make a permissible “end run” to build some assets that can “go Roth” in the near future. If the tax law changes taking effect in 2010 stay in place for years to come, you will be able to open a non-deductible IRA annually (as long as you keep earning income) and convert it to a Roth each year.
Why would Congress give IRA holders a break like this? The simple answer: quick revenue for the federal government. In 2010, a LOT of cash will be pumped into the Roth IRA program, and that will result in a LOT of taxes as a result of the conversions (a short-term revenue boost).
Ready for 2010?
Whether you do or don’t convert a traditional IRA into a Roth in 2010, you will want to know about the changes in tax law affecting IRAs and other retirement savings vehicles, and your estate and your investments. Before you make a move with your IRA, talk to a qualified financial advisor or tax professional who understands the coming rules modifications.
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Basic, clear cut and helpful information.
SITUATION FOR MANY RETIRED PEOPLE. Concerning retired people over age 70… Who wish to switch from IRA to Roth… And who have all IRA funds in CD’s…
HOW IS A CONVERSION DONE IN 2010? How can CD’s be rolled into Roth? Do the CD’s have to be cashed in first, and the liquid assets rolled into Roth? Or can the CD’s be rolled into Roth without cashing them in 1st? Please go over the steps one must follow.
Many thanks…
I am currently contributing to a 457 plan. Would I be able to convert this to a Roth IRA?
Only if you are separated from service.
Can funds invested in the Federal Employees Retirement System, Thrift Savings Plan get the same conversion treatment as a traditional IRA?
If you are separated from service, then absolutely yes.
I still do not know to how much is the maximum amount that each person
allowed to convert to Roth IRA 2010?
There is no maximum amount.
Once I do a conversion of a traditional IRA do I need to wait 5 years to take funds out tax free on principal and growth or can I take it out immediately?
You are subject to the five year holding period. However, if you are over the age of 59 1/2, you have access to the principal, but the earnings must still satisfy the 5 year holding period.
I am under 59 and have an existing Roth IRA. I’m considering rolling more money into it, but will the five-year 10% penalty be applied to the penalty-inducing amount first or last? For example if I have 15k of principle in the account and roll in another 5k, will I still be able to withdraw up to 15k of the principle before hitting a penalty?
At which year’s tax rates will the converted IRA be taxed. If converted in 2010 and elect to pay the tax in 2011 and 2012, will the converted amount be taxed at 2010 tax rates? Or at 2011 and 2012 tax rates?
The tax rate will be based on the income in the upcoming tax years, not what your income is in 2010.
After conversion to Roth from traditional IRA, do the funds have to stay in the Roth 5 years to avoid early withdrawal penalties? Or is the 5 years limit also exempted in 2010?
In considering the Roth IRA conversion, am I able to exclude a 401K plan I have in place with my former employer, and look at only my IRA accounts? I never rolled it to an IRA, just left it as a 401K
Yes, you can leave out the 401k. If you do, however, make sure to not roll that 401k into an IRA this tax year otherwise it would be included.
Will converting from Traditional to Roth IRA in 2010 be counted in MAGI for 2010? And if so, that will cause my MAGI to be in excess of $166K (joint) so I can’t contribute to my Roth in 2010…correct?
Can I do two separate conversions in 2010?
1. One for which I pay tax in 2010.
2. A second separate conversion for which I pay taxes in 2011 and 2012.
No. You must choose one or the other. If you have a spouse, they could elect do a conversion differently than you.
I am currently unemployed and have approximately $130,000 in a 401k from my former employer. As I do not have a job and I am a full time student with minimal income, would the conversion of these 401k funds to a Roth IRA be the best thing I can do in this situation? I am 49, so I would be able to wait more than 5 years to access the money.
Probably not. You need to pay the tax out of pocket, especially since you’re under 59 1/2. Paying them out of the IRA will hit you with a 10% early withdrawal penalty.
I’m thinking of rolling over an old employer 401k to a Roth IRA. Does the 401k need to be first rolled over to a traditional IRA and before it can be converted to a Roth IRA? Are you saying that the roll over out of the 401k is treated as an early withdrawal and will be subject to withdrawal/penalty taxes? Thanks!
IF I SET UP A ROTH AND PAY THE TAXES BEFORE 15 APRIL 2011;AND THEN DECIDE TO RETRACK THE ROTH PRIOR TO OCTOBER 2011;WHAT HAPPENS TO THE TAXES THAT I HAVE ALREADY PAID ON THE CONVERSION? THANKS
You’ll have to file an amended tax return and then look to get a refund for what you paid.
If I rollover from my IRA to ROTH do I need to increase my withholding tax so I don’t get hit with the under withholding penalty when I file my 2010 and 2011 tax return? Or since the rollover is not regular income is it excluded from the under withholding penalty?
This a special event and you won’t be hit for your taxes until 2011 and 2012, so no need to adjust anything immediately.
Question: Would I be eligible for a regular $6000 Roth IRA this year, if I also included in 2010 taxes the rollover Roth IRA$65000?
As long as you don’t exceed the phaseout limits, then you’ll qualify to contribute new money.
What evaluation will IRS accept to convert real-estate IRA to a Roth. My land has dropped since I put it in IRA. Will a Brokers cost comparison evaluation or appraisal suffice? Can you show me what the code states? I thought I saw somewhere a brokers evaluation is sufficient.
Will the no-income limit carryover into future years after 2010?
401K TO ROTH DIRECTLY IS PERMITTED?
CAN PART OF THE 401K BE CONVERTED ? AND THE BALANCE EITHER LEFT IN THE 401K OR ROLLED TO A TRADITIONAL IRA?
Traditional IRA-Roth Converions?
Can you convert a portion of your Traditional IRA account yearly, or are you required to do an entire conversion at once.
I have one deductible traditional IRA account and one non-dedutible IRA account. When I convert all the non-dedutible IRA account to Roth, do I have to take the deductible traditional IRA account into the tax calculation?
I am retired and have a 401k with a former employer, I am currently receiving mandatory withdrawal. Can I convert my 401k into a Roth IRA? How would this effect 2010 taxes.
I am 63 and a half. I plan on working 3 more years, would it pay for me to move my Traditional 401k to a Roth 401k this year and what tax rate is applied to the taxible funds?
Can 2010 Roth conversions still be made in 2011 before taxes are due?
Since 2010 is past, any news on what the rules are for 2011? I am a dual US/Canadian citizen, currently residing in Canada. I have a 401k and an IRA from former jobs. What would be the US tax implications if I wanted to roll them both into a single Roth IRA in 2011? (I think the current treaty would make my eventual Roth IRA withdrawals non-taxable in Canada…)
I converted a regular IRA to a ROTH in 2010 and received a 1099-R for it. If I don’t have to pay taxes on it until 2011 and 2012, will the IRS ignore the 1099-R this year and not come after me for not putting it on my 2010 return? And how do I put it on taxes for 2011 and 2012–list half of the amount on each year’s return? Thank you for your help!
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