Money in the Middle

Sandwich Generation Talking About Money Up, Down and Across Generations

Silver Lining in Low IRA Values- 2010 Roth Conversion

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There’s a change coming in 2010 that could mean more tax free retirement income for you in the future.  In 2010, the income cap on converting traditional IRAs to Roth IRAs is eliminated opening up this investment to more people.  Yet, new research from USAA finds many baby boomers are sticking with traditional IRAs rather than converting them to Roth IRA.

 Whether it’s a lack of awareness or understanding of Roth IRAs or fear of the tax bill due now, the survey found that the majority (73%) of baby boomers who own an IRA aren’t planning to convert to a Roth IRA.  That’s too bad because this is a unique opportunity.  so it’s worth getting up to speed on the change in rules if you have a traditional IRA.

 What’s the change all about?  In 2010 the income cap on Roth IRAs expires (it is currently not available to those with a modified adjusted gross income of $100,000).  If you are in that category, you should take a look at the change in the rules and see whether converting to a Roth in 2010 makes sense. 

What may be stopping some people is that the tax payment is due on the converted funds. But, any investor who converts can pay the tax bill over a two year period. 

“There may never be a better time than in 2010 to create a tax-free stream for retirement, according to USAA senior vice President Terri Kallsen.  “The combination of lower account values, historically low income-tax rates, conversion income limits lifting and the ability to pay the tax bill over two years provides a rare opportunity to potentially increase you income in retirement …”

 If most of your answers to the following questions are “yes”, a Roth IRA conversion may be worth considering:

  1. Is your traditional IRA account value down?
  2. Do you want to leave IRA assets to children/heirs?
  3. Do you anticipate tax rates will rise in the future?
  4. Do you want to have tax free income in retirement?
  5. Do you want to have the flexibility to control when you pay taxes on retirement income?

You should check with a financial or tax advisor before you make the decision.  But now is the time to start thinking about whether converting your traditional IRA to a Roth IRA in 2010 makes sense.   If you can afford to pay the taxes now, tax free income in retirement is a pretty attractive reason to consider it.

Here’s an article  from mint.com that tells you more about Roth conversions and another one that explains the rules.  The time to start planning is now.

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Written by Laura Rossman

August 18, 2009 at 3:29 pm

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