Roth IRA: to Convert Or Not to Convert, That is the Question

January 21, 2010

We have written and spoken with you about the new rules effective in 2010  regarding Roth IRA Conversions and there have been many articles in the press discussing the issues surrounding conversion. Any decisions regarding this topic should be viewed within your total tax and estate planning strategy; however, there are a couple of ideas to consider.

If you have sufficient earned income and no existing IRA, the funding and immediate conversion of a non-deductible IRA to a Roth IRA is non taxable. The maximum which can be contributed each year is $5,000 ($6,000 if you are over 50 years old). If you contribute for 2009 (by April 15, 2010) and 2010 at the same time, and convert from the IRA into a Roth IRA, those funds will grow tax free. Timing is important since the money grows tax free from the date of the conversion. You can name a child a beneficiary and provide a tax-free investment at a very low cost. This also applies to your spouse.
If you have an existing traditional IRA (that will eventually be taxed) and you want to convert to the Roth IRA, you will pay taxes on the portion that you decide to convert - which can be spread over two years. But if tax rates increase in 2011, you should consider reporting all the IRA conversion income in your 2010 tax return. This eliminates future taxes on the growth of Roth funds which can be withdrawn without penalty when and if you need to after the required period of 5 years and/or age 59 1/2. This is not an all or nothing process and you can choose the amount to be converted.

For more information, please contact your PerelsonWeiner partner.

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