Big Opportunity for IRA Conversions Coming in 2010

The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) will take effect January 1, 2010, and with it comes changes that could affect how you deal with any IRAs you may have.

As you likely know, there are two types of Individual Retirement Accounts (IRAs), Traditional and Roth. Here’s a short breakdown of each:

Traditional IRA

• Contributions are tax deductible
• Mandatory distribution at age 70½
• Taxes are paid on withdrawals
• No income restrictions to open/contribute
• Penalty for withdrawals before age 59½ 

Roth IRA

• Contributions are not tax deductible
• No mandatory distribution age
• Qualified withdrawals are tax free
• Maximum income limited: $95,000 single filers/$150,000 married couples
• Principal contributions can be withdrawn without penalty

The big difference resulting from TIPRA will be how income is reported when converting a Traditional IRA to a Roth IRA. Up until 2010, any amount converted had to be reported as income on that year’s tax return. For 2010, conversions won’t have to be reported on your 2010 tax return. Under this Act, you’ll be able to split the reported taxes over two years, 2011 and 2012.

As an example, if you convert a Traditional IRA worth $100,000 to a Roth IRA in 2010, you could report $50,000 in income for 2011 and $50,000 for 2012.

If splitting the tax liability isn’t to your advantage, you can opt out of spreading the taxes over two years and pay it in the years following your distribution.

In addition, because you’re converting your investment to a Roth IRA, you’re taking care of taxes now, leaving you to enjoy tax-free withdrawals upon retirement. And don’t forget, with the Roth IRA, you have no mandatory distribution of funds at age 70½ like you would have with a Traditional IRA.

This is good news for those looking to convert an existing Traditional IRA to a Roth IRA, but there is one important thing to note: this is a one-year opportunity only. 2010 is the only year this special tax incentive will be available, so you must act during 2010.

Learn more about The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA).

You can also link directly to information about Roth IRA conversions at our Retirement Central site or call 314.264.5350 to talk to a Vantage IRA specialist.