New Rules for Roth IRA Conversions
by bambi holzer

If you're not very familiar with Roth IRA conversions, consider yourself lucky. For most of my clients, converting retirement savings to a Roth IRA has never been a viable option-simply because they make too much money: Historically, individuals whose modified adjusted gross income (MAGI) exceeded $100,000 were ineligible to convert retirement savings from a traditional IRA into a Roth IRA.

That's changing as of January 1, 2010. Thanks to the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), the income eligibility restriction on Roth IRAs has been lifted.

Many of you may be not even be aware of this news: According to a recent survey from Charles Schwab & Co., 61 percent of high-income Americans who were surveyed didn't know about the upcoming Roth conversion rule change, and 34 percent were unaware of the general benefits of a Roth IRA versus a traditional IRA.

For those of you who are among the approximately 23 million American taxpayers with traditional IRAs and adjusted gross incomes of more than $100,000 (according to the Internal Revenue Service), this rule change opens you up to the myriad benefits of a Roth IRA conversion, including:

• No future income tax on converted/rolled over assets
• No required minimum distributions (RMDs)
• Tax-free asset growth when doing a qualified distribution

Taxpayers who convert to Roth IRAs by December 31st, 2010, get the added benefit of the option to pay the resulting tax burden over two years (2011 and 2012), rather than all at once.

Certainly, the government will get a boost from all those extra tax dollars. But will your retirement assets get a boost, too? Is converting to a Roth IRA right for you? That's a question that should be addressed with your accountant, says Alin Wall, CPA, a partner in the Family Wealth Group at RBZ, LLP in West Los Angeles. "Like anything in the tax area, there isn't one answer that works for everyone," she says. Still, the best candidate for a Roth IRA conversion is someone who's relatively young and in good health who has time for the Roth IRA to grow-and, more importantly, who has the funds outside of the IRA to pay the taxes. For someone with a multi-million dollar IRA, that can be an unpleasant upfront tax hit.

"Go to your accountant and ask, what would it look like if I did or didn't convert? What's it going to cost me? What are the benefits to my family?" Wall advises. "It's not a given that you'll come out better."

If you do decide to convert to a Roth, carefully consider the timing. As I mentioned above, converting in 2010 gives you the opportunity to spread out your tax burden over two years. But the state of the stock market is another thing to consider: you'll get more leverage out of converting to a Roth IRA now if your retirement account assets are still undervalued.

As with any investment, the decision to convert your retirement assets from a traditional IRA to a Roth IRA (or not) isn't one to be made lightly. But this new opportunity deserves your attention and action-and, possibly, your assets.

For questions or clarification, contact Bambi Holzer Financial Group