Converting from Traditional IRA to Roth IRA in 2010
Starting in 2010 anyone can convert from a traditional IRA to a Roth IRA regardless of income. Currently, you must earn less than $116,000 for individuals or less than $169,000 for couples to be eligible for the Roth IRA partial contribution. For full contribution, its $101,000 for individuals or less than $159,000 for couples.
Additionally, if you make over $100,000 per year, you are not eligible to convert a traditional IRA to a Roth IRA. But in 2010 the doors will be swung wide open to everyone because of the Tax Increase Prevention and Reconciliation Act of 2005 signed into law on May 17, 2006, by President George Bush, which included a provision dealing with conversions of traditional IRAs to Roth IRAs.
But beware, because traditional IRAs are pretax dollars and Roth IRAs are after-tax dollars, you must pay taxes on the money to transfer to the Roth. Many financial advisers recommend that younger investors roll over into the Roth and pay the income tax because in the long-run they benefit from tax-free growth. Other financial advisers recommend converting now (regardless of age) because it’s inevitable that income and capital gain taxes will increase due to the growing national deficit and current corporate bailouts.
To help soften the blow of paying taxes if you decide to transfer to a Roth IRA you can spread the tax bill over 2011 and 2012. For example, if you convert $50,000 from a traditional IRA to a Roth IRA, assuming a 30% tax bracket, you will have to pay $15,000 tax bill. However, if you transfer in 2010, you can declare $25,000 in 2010 and $25,000 in 2011, which in essence gives you a one time, interest free loan from Uncle Sam for 1 year.
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7:19 am on April 5th, 2009
Be careful if you are on Medicare and transfer a traditional IRA to a Roth IRA. A law was past in 2003 regarding income limits and your Medicare premium. New income limits are published every year in Oct or Nov. If you exceed these income limits including tax exempts, traditional IRA’s converted etc, 2 years down the road your Medicare premium will increase. The premium could be in excess of $400 a month for both husband and wife resulting in an $800 a month bill.