New 2010 Rules for Roth IRAs
Beginning January 1, 2010, the income and filing status requirements for rollovers (including conversions) to a Roth IRA was eliminated. Additionally, for rollovers to a Roth IRA in 2010 only, a special 2-year option for reporting taxable portions of your rollover apply.
Under the new rules, regardless of your income or filing status, you can roll over (convert) the following to a Roth IRA:
- Your traditional individual retirement arrangement (IRA), SEP IRA or SIMPLE IRA;
- an Eligible rollover distribution (ERD)- For example, a 401(k) or a 403(b) plan; or
- an ER from a retirement plan for which you are a beneficiary.
For rollovers and conversions to a Roth IRA in 2010 only, you have the option of reporting the taxable portion of your rollover in your gross income 2010, or reporting half in 2011 and half in 2012.
Previously, to roll over to a Roth IRA, both of these requirements needed to be met; your modified AGI (Adjusted Gross Income) was less than $100,000 and your filing status was not married filing separate.
What does all of this mean? What is the benefit? The benefit of owning a Roth IRA compared to the other retirement vehicles listed above is that the earnings in the account grow tax-free. All of the other retirement products offer tax-deferred income, which means that the retirement account will grow for years without causing a taxable situation until you withdraw funds. At some point in the future when you make a withdrawal from the account, you will need to declare the income on your personal tax return and pay personal income tax on any disbursements.
When you invest via a Roth IRA the earnings in the account grow tax-free. This means that later on when you take a disbursement from the account, you will not pay income tax on any earnings that are being withdrawn. This could prove to be a powerful investment tool at this time while the stock market is still relatively low and there are some really good deals out there.
The conversion to a Roth IRA is a taxable situation, and as mentioned above the tax effect can be spread over two years. Of course, everyone has a different financial situation and before making any changes to your retirement accounts, please contact us to discuss the potential tax liability that is faced.