Roth Conversion Strategies for 2010

2010 will offer new opportunities for Roth conversions, including some strategies that could benefit from planning during the remainder of 2009.

Background
As many of you know, rules for converting a traditional IRA to a Roth IRA have been liberalized, beginning in 2010. Specifically, next year the $100,000 maximum adjusted gross income limit has been eliminated. Any tax payer can now complete a Roth conversion regardless of how much income they report.

As before, the amount converted from the traditional IRA to a Roth IRA is claimed as income on your tax return. However - for 2010 only - the taxpayer has a choice of when to report the income: all of it in 2010 or half in 2011 and half in 2012. You cannot do a combination of these strategies.

Roth Conversion: Right for You?
Whether or not you should complete a Roth conversion in 2010 is a question you should discuss with your advisor. Factors that will be important in your discussion include, but are not limited to:

1.   Future tax rates and your likely marginal tax bracket
2.   Amount of taxable (non-qualified) assets you have in comparison to your retirement accounts
3.   Pensions, Social Security and annuity income you anticipate
4.   Legacy and estate planning issues – for instance: what you want to leave to your heirs
5.   Lump sum spending goals - such as cars or education
6.   Amount of money available – outside of the traditional IRA – to pay the taxes.

Roth Conversion Strategies
Assuming you have decided to complete a conversion from your traditional IRA to a Roth in 2010, here are some strategies to consider:

1.   Pay the tax in 2010 if you believe your marginal tax rate is going to be higher in 2011 and 2012. This could result from legislation or from your own personal circumstances. Any income you can accelerate into 2009 as well as the postponement of deductions into 2010 would be helpful.

2.   Pay the taxes in 2011 and 2012. In this case you are betting that your marginal tax rate will not rise or will increase only slightly. This could be because you are retiring and will be receiving less income or because your tax rate is already low and the splitting the tax over two years will not effect your marginal tax rate.

3.   If you have an old 401(k), which consists all of pre-tax dollars, and you want to position it in an IRA for conversion next year, now would be a good time to roll the account over to a traditional IRA.

    a. Some plans allow for direct contributions to Roth IRAs from non-active 401(k)s allowing you to bypass the move to the traditional IRA. However, any rollover to a Roth prior to January 2010 will be subject to the $100,000 income limitation rules and taxed in 2009.

    b. If you have an old 401(k) with a mixture of pre-tax and after-tax contributions and your income has been too high for a Roth conversion, next year would be a good time to take a complete distribution of your retirement plan, by moving the pre-tax dollars into a traditional IRA and cost basis (after-tax contributions) into a Roth IRA. Timing is important. You cannot roll the after-tax money into the Roth on a date prior to taking your pre-tax distribution. In addition, not all retirement plans allow a direct rollover to a Roth account.

4.   If your current income exceeds the Roth IRA income eligibility limits, 2009 might be a good time to make a non-deductible (after-tax) contribution to a traditional IRA, in anticipation of a conversion next year. This strategy only works if you have no other traditional IRAs or only very small IRAs and you plan to convert the entire amount. This is because all IRA balances are aggregated for calculating the tax on conversion amounts, meaning after-tax distributions will be a percentage of your entire IRA balances and cannot be isolated for conversions.

StrategicPoint Working with You
These are some of the strategies available to you regarding a Roth conversion.
If you have any questions about what you can/should do, please give us a call so we can walk you through your options.

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