ROTH IRA CONVERSION for 2010



Beginning with the 2010 tax year, there is a new provision in tax law which presents the taxpayer with significant tax savings possiblities.

Taxpayers can convert their current IRA's into ROTH IRA's no matter how much their adjusted gross income!
 (The 2009 rules allowed conversion only if adjusted gross income was $100,000 or less.)

The conversion takes place in 2010, but, you pay the taxes on the conversion in 2011 and 2012.
The ability to "convert" does not apply just to IRA's. It also applies to old 401ks you have lying around.

ARE YOUR ELIGIBLE TO CONVERT AN IRA INTO A ROTH IRA?

MORE FACTS ABOUT ROTH IRAS

Let me start by discussing what a ROTH IRA is. There are several types of Individual Retirement Accounts available such as:

TYPES OF IRAS

  • Traditional IRA
  • Non-Deductible IRA
  • Spousal IRA
  • Educational IRA
  • Simple IRA
  • ROTH IRA

    Each IRA type has different rules and targets different groups of people. Below is a list of qualifications which must be met to contribute to a ROTH IRA.

    EARNED INCOME RULE

  • Taxpayer must have earned income such as wages or self-employed income.

    INCOME LIMITATION RULES

  • There are also adjusted gross income limitations:

  • Single filers, Head of Household or Married Filing Separately with modified adjusted gross income up to $105,000 can make a full contribution.

    Contributions are phased out starting at $105,000 and you cannot make a contribution if your adjusted gross income is in excess of $120,000.

  • Joint filers with modified adjusted gross income up to $166,000 can make a full contribution. Once again, this contribution is phased out starting at $166,000 and you cannot make a contribution if your adjusted gross income is in excess of $176,000.

    AMOUNT OF CONTRIBUTIONS

    The following table shows the amount of contributions allowed for tax years 2006-2010:

       
    Tax Year  Contribution Limit Limit with Catch-Up
       2006        $4,000     $5,000
       2007        $4,000     $5,000 
       2008       $5,000     $6,000
       2009       $5,000     $6,000 
       2010  Indexed to Inflation  Indexed to Inflation


    TRANSFER RULES

  • Account-to-Account - You can ask the trustee or custodian of the traditional IRA to transfer the funds to another institution that is managing your Roth IRA.

  • Same-Trustee - This is converting a traditional IRA to a Roth IRA account with the same financial institution or simply re-designating the IRA as a Roth IRA.

  • Rollover - A rollover is taking a distribution from a traditional IRA and moving it to a Roth IRA within 60 days of receiving the distribution.

    If the above transfers are not done correctly, you could be subject to a 10% federal penalty and a 2.5% state penalty.

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