Ready, Set; Convert into a Roth IRA post #2.

Conversions into Roth IRA’s in 2010 should be considered by all individuals unable to convert in 2009, note that partial conversions of your prior employer retirement plans into Roth IRA’s are also possible.

If you are a young professional with a long career ahead of you, chances are you are in a lower income tax bracket now than the tax rate during retirement. You probably also have significant tax deductions including mortgage interest as well as dependency exemptions.

If you are retiring in the next few years, or already retired with significant IRA and qualified retirement assets, it is not too late for you either. You can still consider the conversions for your later retirement stages as well as building an income tax free legacy to your future generations.

Planning points: your strategy should be to convert into the Roth IRA as much as possible without increasing your income tax rate. You should convert your retirement plan early in the year, and extend your tax return to October of 2011. This will allow you to monitor your converted Roth IRA since you can change your mind and re-characterize or undo your conversion. As always, when considering income tax decisions, reach out to your tax advisor to address your specific circumstances.

As we mentioned in my prior post http://thetaxchick.blogspot.com/2009/08/traditional-ira-conversions-into-roth.html#links that starting in 2010, the $100,000 adjusted gross income limitation will no longer apply. Anyone regardless of the income limit can convert into Roth IRA’s.

Five Reasons why you should convert into a Roth IRA:

1) Most retirement accounts are currently trading at lower values than few years ago given the current stock and bond market conditions. Yes, this statement still holds true even with the recent stock market uptick in 2009. Upon the conversions to Roth IRA, the IRS will tax you on the “lower” value of your IRA or retirement plan.
2) Suspension of the required minimum distributions at age 70 ½ provides you with a significant advantage and control over your tax situation now and in the future.
3) Income tax liability should be paid from outside funds (ie, non-IRA/ Retirement Plans), to ensure a successful conversion. Paying the income tax liability on the conversion will reduce your taxable estate and your estate tax liability as a result.
4) The IRS is allowing you to pay the taxes over the following two years, so your first tax bill will be due April 15, 2011 and the next one will be due April 15, 2012.
5) It’s better to die with a Roth IRA than with a traditional IRA…….Grim, but true. Your beneficiaries will also benefit from the income tax free distributions from your Roth IRA as opposed to paying the income tax at their ordinary income rates (up to 35%).

We can run all sort of fancy analysis and calculate the impact in the end on conversions to Roth IRA’s vs. keeping the IRA and other ERISA plans as is. In most circumstances, you come out ahead with the Roth IRA conversion. The factors to consider are income tax rates now vs. in the future, your growth rate on the account, your time horizon as well as the available funds to pay for the income tax.

You can convert the following accounts into a Roth IRA: Traditional IRA’s, 401(K) Plans starting in 2008, 403(B) Plans, Government plans also known as 457 Plans and Profit Sharing Pension Plans. So in general ERISA & Non ERISA plans can be converted directly into a Roth IRA. You can also convert Inherited Pension Plans into a Roth IRA, but not Inherited IRA’s. You also cannot convert Educational IRA known currently as Coverdell Savings Accounts.