| Although you can make contributions to a Roth IRA on an annual basis (if you meet income requirements), you also have the ability to convert existing IRA or workplace retirement plan (such as your 401(k) plan) assets to a Roth IRA. There are immediate tax consequences when the conversion occurs. Any pre-tax contributions and all earnings built in the account being converted will be subject to current income taxes. A different rule for 2010
A significant change in tax laws will occur effective at the beginning of 2010 when income limits related to a Roth IRA conversion are eliminated. Whereas, in the past, single filers with a modified adjusted gross income above $100,000, or married couples filing separate tax returns, were not eligible to complete the conversion, under the new rules, nearly everybody, regardless of income level, will qualify to complete a conversion.
The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), in addition to removing the income limits for Roth conversions, also allows a unique opportunity for Roth conversions that occur in 2010 only. The law stipulates that any tax liability incurred as part of a Roth IRA conversion in 2010 can be deferred and divided into the 2011 and 2012 tax years. In other words, if $100,000 in assets were converted to a Roth IRA and subject to taxation, there would be no impact on your tax liability for 2010. Instead, $50,000 of the converted amount would be claimed on the 2011 tax return, and the other $50,000 of the conversion claimed on your 2012 tax return. The two-year spread of taxation is the default, but investors will have the option to claim the associated taxation in 2010.
 Roth not an automatic decision
While the concept of generating a stream of income that is potentially free of income tax is appealing, a Roth IRA conversion is not necessarily the best choice for everybody. It is best suited for those who:
• don’t need access to money in the account for the first five years after the account is established (ideally, the holding period will be even longer to allow more tax-free growth in the account);
• are able to pay the tax due on the conversion from money that is not part of the account being converted (to keep as much money invested in a tax-advantaged way as possible);
• expect to be in a higher tax bracket in retirement, a clear benefit if tax-free withdrawals can be taken from a Roth IRA at that time.
There are additional considerations, such as the impact on your estate and the ability to leave your heirs with inheritance that could potentially be available to them on a tax-free basis for years to come.
Your decision to convert is reversible
If you are uncertain whether a Roth IRA conversion is right for you, the good news is that the government gives you the ability to choose a “do-over.” Suppose you decide to convert an existing IRA account to a Roth IRA in January 2010. As you are completing your 2010 tax return in 2011, you determine that the conversion was not in your best interests. You can still, up to your tax-filing deadline, including the extension period (as late as October 15th in the year following the conversion) choose to recharacterize your IRA dollars back to a traditional IRA, foregoing the Roth IRA conversion and the tax liability it would have created.
This is one of many variables that can come into play as you consider whether to complete a Roth IRA conversion. Research your options carefully, and be sure to consult with a tax advisor before making any decisions. This column is for informational purposes only. The information may not be suitable for every situation and should not be relied on without the advice of your tax, legal and/or financial advisors. Neither Ameriprise Financial nor its financial advisors provide tax or legal advice. Consult with qualified tax and legal advisors about your tax and legal situation. This column was prepared by Ameriprise Financial.
Financial planning services and investments offered through Ameriprise Financial Services, Inc., Member FINRA & SIPC.
©2009 Ameriprise Financial, Inc. All rights reserved.
File # 91808 (11/09)
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| As an experienced experienced advisor, Heather knows that everyone’s financial picture is different, and that priorities change depending on their time horizon, how they accumulated their wealth, and their long- and short-term goals. So Heather helps each of her clients develop a strategy tailored to their unique needs and goals. She is licensed and registered to conduct business in VA. Based on licenses and registrations she holds, she may also conduct certain business in MD, NC. She has a BA in Russian Studies from Mercyhurst College and is an active member of the Ocean Front Jaycees. For more information, visit www.ameripriseadvisors.com/heather.j.miller
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