Roth IRA conversions: new rules may benefit you.

• Author: Jimenez, Carmen J.
• Position: INVESTMENTS

It is well known that planning pays, especially when dealing with income tax law. With the passing of the Tax Increase Prevention and Reconciliation Act (TIPRA) in 2005, there are new rules for traditional IRA-to-Roth IRA conversions. However, these changes do not to become effective until 2010. These rules provide high-income taxpayers with new tax planning opportunities.

Prior to 2010, an individual was able to convert a traditional IRA to a Roth IRA, without incurring the 10 percent withdrawal penalty, if their modified adjusted gross income was less than $100,000 and if the taxpayer is not married filing separately. These two requirements were very restrictive. With the passing of TIPRA, beginning in 2010, an individual may convert a traditional IRA to a Roth IRA regardless of income and filing status. In addition, the tax related to a Roth IRA conversion maybe deferred and paid ratably over two years in 2011 and 2012. Basically, any taxpayer with a traditional IRA can convert to a Roth IRA and pay the tax over two years. However, this does not mean a traditional IRA-to-Roth IRA conversion is for everyone.

The Roth IRA conversion presents tax planning opportunities and challenges due to the immediate recognition and increase in income from the distribution of the traditional IRA. The entire balance of the traditional IRA conversion will be taxed as ordinary income, at your marginal income tax tare. Depending on your other income and the amount of the traditional IRA, conversion will most likely present one with a significant income tax liability.

BENEFITING YOU

The inclusion of the traditional IRA in income is a result of the tax benefit received when a deductible contribution is made to a traditional IRA. Your income is reduced by the traditional IRA contribution amount, creating a tax benefit. When distributions are received from a traditional IRA account they are taxed, a benefit when contributed and tax due when distributed. A Roth IRA allows you to contribute with after-tax dollars, with no income tax benefit like the traditional IRA, and qualified distributions are not taxed.

QUALIFIED ** ROTH IRA DISTRIBUTIONS

** this list is not all-inclusive

* A five-year holding period must be met

* Account holder is at least age 59-1/2

* Death

* Disability

* Qualified purchase of a first home

Since 2009 has passed and it is early in the new year, there is still time to take advantage of this special tax treatment. In addition, to making a...