Roth IRA conversions in 2010.

• Author: Aponte, Stephen
• Position: Individual retirement accounts

The Tax Increase Prevention and Reconciliation Act of 2005, P.L. 109-222 (TIPRA), enacted on May 17, 2006, contained a provision that allows more taxpayers to convert their traditional IRAs to Roth IRAs starting in 2010 (Secs. 408A(c) (3) and (d)(3)(A)(iii)). This could be a huge benefit for some high-income taxpayers that in the past have not been able to make use of the many advantages Roth IRAs have over traditional IRAs.

Roth IRAs originated with the Taxpayer Relief Act of 1997, P.L. 105-34. They differ from traditional IRAs in a few important respects, including but not limited to the following:

* Contributions to Roth IRAs are never deductible for income tax purposes. Traditional IRA contributions can be.

* Distributions from Roth IRAs can be taken at any time without penalty. Distributions from traditional IRAs before turning age 59 1/2 are generally subject to a 10% penalty.

* Unlike with traditional IRAs, individuals are not required to take minimum distributions from a Roth IRA when they turn age 70 1/2.

* Distributions from Roth IRAs are generally tax free. Any tax-deferred portion of a traditional IRA distribution is subject to ordinary income tax.

* Roth IRA contributions can be made by taxpayers only under a certain income amount. (Contributions to Roth IRAs are fully phased out in 2009 at $176,000 for married taxpayers filing jointly and at $120,000 for single taxpayers.) There is no such limitation for traditional IRAs.

The last difference has prevented high-income taxpayers from taking advantage of Roth IRAs. In addition to the income limitation for contributions, there has been an income limitation for rollovers from traditional IRAs to Roth IRAs. Taxpayers with modified adjusted gross income (AGI) greater than $100,000 are precluded from making such rollovers. For this purpose, modified AGI is defined as it is for traditional IRA purposes, but it does not include income from the conversion. It also does not include any required minimum distribution from an IRA (See. 408A(c)(3)(C)(i); Regs. Sec. 1.408A-5). Rollovers made from a traditional IRA to a Roth IRA are subject to ordinary income tax but are exempt from the 10% early withdrawal penalty.

Changes for 2010

For tax years beginning after 2009, the $100,000 modified AGI limit for conversions has been eliminated. In addition, taxpayers with a filing status of married filing separately, who have previously been precluded from making such conversions, will be able to do so...