Jane M. Young, CFP, EA
Beginning in January 2010 the income limit of $100,000 AGI (adjusted gross income) on converting a traditional IRA to a Roth IRA will be lifted. This is a huge opportunity for many who have been unable to contribute to a Roth or convert to a Roth due to income restrictions. Normally, when one converts a traditional IRA to a Roth IRA the amount converted is added to gross income in the year of conversion. However, for conversions made in 2010 the government is allowing you to spread out the payment of taxes over the 2011 and 2012 tax years.
Why should you care about this now, prior to 2010? There are several things you can do to prepare for this opportunity. This is a great time to fund your traditional IRA, non-deductible traditional IRA or your 401k plan, if you are planning to retire or change companies soon, in anticipation of converting it to a Roth in 2010. You will need cash to pay the taxes associated with converting to a Roth IRA, so you should be incorporating this additional need for liquidity into your financial planning today.
This is the first in a series of postings on Roth IRAs and Roth IRA conversions.
Jane M. Young, CFP, EA
1. No required minimum distribution in 2009 for IRA, 401k, 403b, 457b, 401k and profit sharing plans. This does not apply to annuitized defined benefit plans.
2. If you are older than 70 ½, in 2009 you can make charitable gifts from your IRA without the payment being included in your adjusted gross income. The distribution must be a “qualified charitable distribution”, which means it must be made directly from the IRA owner to the charitable institution. This is especially beneficial if you claim a standard deduction and were unable to deduct charitable contributions by itemizing.
3. Beginning in 2010 individuals earning over $100,000 in modified adjusted gross income will be able to convert traditional IRAs to Roth IRAs. Modified adjusted gross income is the bottom line on the first page of the 1040 tax form. Income from a conversion in 2010 may be reported equally over 2011 and 2012.
While there are many benefits to converting from a traditional IRA to a Roth IRA the conversion will increase your adjusted gross income (AGI) which can have some unintended consequences. An increase in AGI may impact the taxability of your social security, phase-outs on itemized deductions, education and your tax bracket.
I will write more about Roth IRA conversions in a future blog.