2010 Rules

There has been a lot of discussion recently about the Roth IRA and whether or not to convert a traditional retirement assets to this type of investment vehicle. However, there have been limitations as to who could convert to a Roth IRA. Beginning in 2010 the rules change.
The Roth IRA is an Individual Retirement Account that allows you to invest in securities (usually stocks and funds). In contrast to a traditional IRA, contributions to a Roth IRA are not tax deductible. Withdrawals are generally tax-free, but not always and not without certain stipulations (i.e., tax free when the account has been opened for at least 5 years for principal withdrawals and the owner's age is at least 59 ½ for withdrawals on the growth portion above principal). An advantage of this type of IRA over a traditional IRA is that there are fewer withdrawal restrictions and requirements. Generally, it does not require distributions based on age or the required minimum distributions of a traditional IRA after age 70 ½. Further, transactions inside the Roth IRA account (including capital gains, dividends, and interest) do not incur a current tax liability. Basically, investments in this type of investment format are made using dollars that have already been taxed. And qualifying distributions are made tax-free. Thus, you pay tax now, not later as in a traditional IRA.
What is a Roth IRA conversion? A conversion allows eligible individuals to convert their traditional retirement assets (such as a traditional IRA or 401(k)) to a Roth. In prior years, those eligible to convert had to have income of $100,000 or less. Effective January 1, 2010, the income limitations have been lifted. This means everyone will be eligible to convert to a Roth IRA, there is no limitation.
Will there be any taxes associated with a conversion? Yes, however, these rules have changed as well. A conversion of a traditional retirement asset is usually reported as income for the tax year the conversion takes place. However, in 2010 only, the conversion amount will be split and reported as income for tax years 2011 and 2012 unless an election is made to report the entire conversion amount on your 2010 taxes. This will spread out the tax consequences of the conversion.
Who will this benefit? The change in rules will benefit the upper income taxpayers who were never eligible before to participate in a Roth IRA. If you would like more information on a IRA conversion and its benefits, feel free to contact anyone of the attorneys in the Estate Planning Department at Quinlivan Wexler LLP.