Converting traditional IRAs to Roth IRAs in 2009.

• Author: Turner, Robert G.
• Position: Individual retirement accounts

While much has been written about the new possibilities of converting traditional IRAs to Roth IRAs in 2010, advisers should not lose sight of the possible benefits of moving the timing up a year.

While 2010 will mark the first time that many higher-income individuals will have easy access to a Roth IRA because of the elimination of the $100,000 income threshold for conversions, the recession may make the conversion available in 2009. Many owners of passthrough entities will see their 2009 income reduced dramatically because of business losses. Even if the adviser cannot be sure that modified AGI will be less than $100,000, consideration should be given to making the conversion and then reversing the transaction if the individual is found to be ineligible for it later.

Converting in 2009

If eligibility for making a conversion is in doubt for 2009, it may be helpful to review the rules for determining modified AGI for the income test. Sec. 408A(c)(3)(C) says that modified AGI for Roth IRA conversion purposes is calculated in the same manner as set forth in Sec. 219(g)(3)(A), which is used to test the eligibility to make deductible IRA contributions. Modified AGI as set forth there is used for limiting the deduction for IRA contributions.

Under Sec. 219(g)(3)(A), modified AGI is determined:

* By taking into account:

* Taxable Social Security and railroad retirement benefits; and

* The passive loss rules under Code Sec. 469; and

* By disregarding:

* The IRA deduction itself;

* The exclusion for savings bond proceeds used to pay higher education expenses (under Sec. 135);

* The exclusion for adoption assistance provided by the employer under an adoption assistance program (under Sec. 137);

* The domestic production activities deduction (under Sec. 199);

* The deduction for interest paid on a qualified education loan (under Sec. 221);

* The deduction for higher education expenses (under Sec. 222); and

* The foreign earned income exclusion and the housing cost exclusion for U.S. citizens living abroad (under Sec. 911).

These rules are further discussed in Regs. Sec. 1.408A-4 in Q&A format. The regulations point out that if the taxpayer is married, he or she must file a joint tax return. In other words, modified AGI must be determined on a joint filing basis. However, a taxpayer who has not lived with his or her spouse for the entire tax year can be treated as unmarried for purposes of this requirement.

The taxable amount involved in a traditional...