Retirement: For Individuals: Roth IRA Conversion

Beginning in 2010, converting your retirement assets to a Roth IRA may be more attractive and accessible than ever before. Roth IRAs offer several benefits, including:

• Potential for federally tax-free growth and distributions*
• Power of compounded earning potential
• Opportunity for federally tax-free distribution to heirs*
• Variety of investment options
• No required minimum distributions

What is new in 2010?

• Effective 1/1/2010, all investors can now convert their retirement assets to a Roth IRA regardless of their modified adjusted gross income or tax filing status.
• For conversions occurring in 2010, investors will have the option to pay taxes as usual or include the amount converted equally in the following two tax years.**

Before you consider converting any of your assets, you’ll want to make sure that a Roth IRA Conversion makes sense for your financial situation. 

Three Simple Steps

Use these simple steps when working with your financial professional and tax advisor to determine if a Roth IRA Conversion makes sense for your situation: 

1. Inventory your retirement assets – Determine how much you want to convert and from which retirement account(s).
2. Determine your tax payment strategy – Make a plan for you tax payments before you complete a Roth IRA Conversion.  Keep in mind that:
   • Paying income taxes with assets from other than your retirement accounts may be beneficial
   • A 10% IRS early withdrawal penalty may apply if you are under 59½
   • The pro-rata rule determines your tax liability if you convert both pre-and post-tax contributions
3. Review your retirement portfolio regularly – Review your retirement accounts at least annually.  Changes in risk tolerance, investment performance, or life events may warrant changes in your retirement strategy.

Is a Roth IRA Conversion Right for You

Eligibility for a Roth Conversion doesn’t automatically mean you should convert your assets.  Roth Conversions may not be appropriate for all investors.  Consult your financial professional and tax advisor to determine if it is appropriate for your individual circumstances.

*Roth IRA contributions are not tax-deductible, but earnings can be withdrawn income-tax-free if you’re at least 59 ½ and have had the Roth at least five years. 

**Conversions are subject to federal income taxes.  State taxes also may apply: check with your local tax advisor.  Refer to IRS Publication 590, Individual Retirement Arrangements (IRAs) for a complete discussion of making contributions and taking withdrawals from IRAs.

Withdrawals made prior to age 591/2 may be subject to a 10% IRS early distribution penalty.

 

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