Brand New Policies Mean Much More People Doing Roth IRA Conversions In 2010

As we near the end of 2010, a lot of folks have already completed Roth IRA conversions, and lots of others are questioning if a Roth IRA conversion in 2010 is the correct move for them.

Why are Roth IRAs in the news so much this year? Before, Roth IRA conversions were restricted to individuals who earned under a certain income limit ($100,000). A change in the guidelines, effective as of January 2010, removes the income cap which means much more individuals are allowed to to convert from normal IRAs to Roth IRAs.

Part of this new rule is the flexibility to pay the taxes from any conversions done in 2010 over a couple of years. Instead of having to pay out the taxes from the conversion all on a single tax return, the IRS is permitting you to pay out half in 2011 then half in 2012.

Although the brand new rules might appear too good to pass up, you ought to check out the situation really carefully before jumping right into a Roth conversion in 2010. Just because you could convert to a Roth does not imply you should do a conversion, at the least not straight away.

Before making a decision on whether to convert or not, listed here are some fundamentals regarding traditional and Roth IRAs you have to be well aware of:

Traditional IRAs

- Cash put into traditional IRAs is tax deductible (income limits apply in case you are covered by an employer sponsored retirement policy)

- Withdrawals coming from traditional IRAs are taxed at your ordinary income tax rate, so in case you are within the 15% tax bracket you would pay out 15% on the amount withdrawn, in the event you're in the 28% tax bracket you will pay out 28% on any distributions, et cetera.

- The IRS requires you to take a minimum amount out (based on your age and the account balance) after age seventy 1/2.

Roth IRAs

- Contributions to a Roth IRA aren't tax deductible.

- You might not be allowed to contribute to a Roth IRA when your revenue is above the limits.

- Qualified withdrawals (have to be at least age fifty nine 1/2 and have had the Roth for a minimum of 5 years) are not subject to income tax.

- In contrast to traditional IRAs, you aren't required to take cash out of your Roth IRA when you reach age 70 1/2

Should You Do a Roth Conversion?

You must consider converting to a Roth IRA if:

- You anticipate to be in the exact same or higher tax bracket once you retire (or when you will need the funds),

- You will not need the cash you convert for 5 years or more, and

- You could afford to pay out the taxes on the conversion without dipping into your own retirement savings.

It is essential to note that just because you could convert to a Roth IRA doesn't mean you need to convert to one. You need to talk to a financial or tax expert to find out if a Roth IRA conversion is right for you, since each situation is totally different. A Roth conversion in 2010 may not make sense for you, but a conversion in future years could make sense if tax laws change or your own situation changes.

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