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Roth Conversion Information

Roth Conversions Get Easier

As of 2010, the $100,000 income ceiling to convert to a Roth IRA from a Traditional IRA was eliminated. Plus, conversions are now available to those who are married but file their taxes separately. Finally, anyone who converted from a Traditional IRA to a Roth IRA in 2010 may choose to have half the converted amount taxed in tax year 2011 and the other half in 2012, thus spreading out their tax bill.  If assets that are converted in 2010 are subsequently distributed from a Roth IRA in 2010 or 2011, the two year taxation will be accelerated by the distribution amount.

Should you convert?

When you convert, your distribution becomes taxable. If you funded your IRA with nondeductible contributions,* then you will owe taxes on the earnings only. If you have deductible contributions, then you’ll owe taxes on the full amount (contributions plus earnings) you want to convert.** Before deciding whether to convert to a Roth IRA, consider your current tax bracket, whether you have the money available to pay the taxes out of pocket on the conversion, and what your estimated tax bracket in retirement will be. In addition, consider the length of time before you need to start withdrawing the money from your IRA for expenses.  Learn more on our Roth Conversion - Next Steps page.

What are the potential benefits?

A key difference between Traditional and Roth IRAs is that qualified distributions of Roth IRA “earnings” are tax free. The benefits don’t stop there in 2010; you can convert all or part of your Traditional IRA to control the amount of future taxes you will owe. For tax year 2010, you may either make a full tax payment on the conversion in 2010, or you can spread the taxes owed equally over the 2011 and 2012 tax years.  If you believe that you’re in a lower tax bracket now than when you retire, you could potentially save more in future tax payments. 

Roth IRAs have no Required Minimum Distribution (RMD) requirements, giving you a two-fold benefit. First they allow you to reduce a potential tax burden associated with claiming the extra income from RMDs at age 70 1/2, and secondly, they allow you to build a legacy of wealth that you can pass on to your beneficiaries, potentially tax free.

Possibilities exist depending on your personal situation. Conversions are not right for everyone and many factors should be considered before taking action. For help in deciding if conversion might be right for you, use one of our three calculators (Basic Conversion, Breakeven Analysis, or Legacy Planning). Ready to get started? Go to our IRA Service Center to access self populating, printable forms, just click on Open an IRA or Manage My Account.   Still uncertain or if you need additional information, don’t hesitate to call us at (866) 543-5202 or (408) 543-5202 and ask to speak to one of our IRA Specialists.

To convert your current Traditional, Rollover, SEP or SIMPLE IRA to a Roth IRA, visit our Roth Conversion - Next Steps page for specific steps and information.

Note: The information provided is not intended to replace or serve as tax, planning, or legal advice. We recommend that you seek competent advice from a qualified tax adviser, CPA, or financial planner.

*Whether a contribution or a portion of it is deductible depends on active participation in an employer-sponsored retirement plan, marital status, and modified adjusted gross income (MAGI), as calculated on your personal IRS form 1040. 

**Traditional IRA holders must pay tax on all pretax dollars.  But these dollars are not subject to the 10% early distribution penalty if properly converted to a Roth IRA.

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