Know the Rules When It Comes to the 2010 Roth IRA Conversion

Just about every financial planner will advise you to know the rules when it comes to the 2010 Roth IRA conversion window. For 2010, the $100, 000 adjusted gross income level has been lifted, meaning that those who have an adjusted gross income (AGI) of less than $100, 000 can actually convert to a Roth IRA this year. Additionally, one doesn't need to wait until 2010 to do so.

As far as it concerns the 2010 conversion, people need to understand that these conversions are normally restricted to those with an AGI of greater than $100, 000. This is whether or not a person is a single filer or are jointly filing as a married couple. For those with AGIs that are high, it might be that 2010 is the best year ever for converting to a Roth IRA.

Currently, the markets are generally in what would probably be considered a down cycle. For those who need to convert their retirement plans or other IRAs to a Roth, this means that they will benefit because any income tax that is going to be paid on that Roth will probably be low because the IRA will be lower in value. If the market rebounds in 2010, however, more tax will need to be paid.

Even though the actual conversion will be characterized as taking place in 2010, people should also be comforted by the fact that the tax due on it be able to be deferred - on a one-time basis - to the 2011 and 2012 textures. The Internal Revenue Service has come up with a provision that will allow people to pay half the tax in 2011 and the other half in the 2012 tax year.

This special provision will only last for the 2010 tax cycle, however. Once 2010 has passed us by, any taxes due on the Roth IRA are going to have to be paid in full in the year following the year in which they are claimed. Or member that if you spread taxes owed out over both tax years, you will be basing your tax rate on 2011. If your income goes up in 2012, you could end up paying much more tax.

Just because the $100, 000 AGI limit has been lifted for 2010, that doesn't mean that the income restrictions will also have been lifted, because they won't be. You might run into this if you happen to exceed IRS phaseout limits that pertain to contributions to a Roth, which means you'll be prohibited from depositing any additional money. There's a loophole that exists and that has to do with non-deductible IRAs, so check on that.

2010 Roth IRA conversions also aren't just limited to converting from a traditional IRA to a Roth IRA, by the way. For those who have old 401(k)s or other retirement plans from a former employer, these can also be converted to a Roth. But converting them to a traditional IRA before hand must be completed. It might make sense to convert all of them at one time rather than wait and end up paying separate tax bills on each of them.

The last thing to check on when it comes to the conversion of 401(k)s into the traditional IRA is to understand that the tax will be determined on the amount of money that existed in the old account when it was converted over. As an example, if you had a 401(k) that was worth $45, 000 and is worth only $25, 000 in the new IRA, you owe tax on the $25, 000.

The 2010 Roth IRA conversion presents a small window of opportunity for those high income earners that could never take advantage of the Roth IRA advantages. Because of the intricacies and individual needs it's recommended you consult a knowledgeable advisor prior to proceeding with the conversion.