Roth-IRA Conversion Rules

• Currently, taxpayers may convert traditional IRAs and qualified retirement accounts, such as 401(k) of 403(b) accounts, to a Roth-IRA as long as their adjusted gross income is under $100,000.  In 2010, and for all subsequent tax years, the $100,000 limit is eliminated and all taxpayers will be permitted to convert their retirement assets to a Roth-IRA.
• The amount converted to a Roth-IRA will be included as ordinary income for the year in which the account was converted.  However, for conversion in 2010 only, taxpayers may elect to defer half of the Roth conversion income to 2011 and half to 2012.
• Should circumstances change, you may ‘recharacterize’ a Roth-IRA conversion back to a Traditional IRA before the due date of your 2010 income tax return, including extensions.

Roth-IRA Distribution Rules

• The Roth-IRA may grow and be distributed tax-free as long as distributions are not taken within five years of the first contribution or last conversion, and not until after age 59 1/2.
• A Roth-IRA is not subject to Required Minimum Distribution (RMD) rules at age 70 1/2.

Questions to Consider in Making the Roth-IRA Conversion Decision

• What is my investment horizon?
• Will I need these funds during my lifetime?
• Do I have sufficient, non-retirement assets available to pay the Roth conversion income tax liability?
• A Roth-IRA is not subject to the Required Minimum Distribution rules at age 70 1/2.
• What is my current income tax bracket?
• What is my anticipated income tax bracket in retirement?
• Do I think income tax rates might be lower or higher in the future?
• Do I think the United States may adopt an alternative tax system?
• Does my QRP account allow for ‘in-service’ distributions eligible for rollover while I am still employed?
• Is my traditional IRA invested in an annuity?
• Do I want to leave a legacy?

Potential Benefits of a Roth-IRA Conversion

• Future Roth-IRA distributions are potentially tax-free.
• Depressed account values potentially provide a lower tax cost conversion opportunity.
• Roth-IRA distributions are not included in Social Security taxable income computations.
• Tax-free investment opportunities are not limited to traditional tax-free investments.
• A current Roth-IRA conversion may provide a hedge against the potential for rising income tax rates.
• Current income tax paid reduces the value of a taxable estate.
• Qualifying non-spouse beneficiary distributions are generally tax-free and may be stretched over the life expectancy of the non-spouse beneficiary.

The decision of whether or not to make a Roth-IRA conversion is extremely complex and requires a judgment on the probabilities of future events including tax rates, tax structure, and income sources.  It is important to consult with a tax advisor who is well versed in income tax law including IRA, Roth-IRA, Qualified Retirement Plan and Annuities prior to making a Roth-IRA conversion decision.

Every situation is different.  Therefore, the information contained in this document should not be construed as tax or legal advice.  Please consult your tax advisor for information specific to your unique circumstances.  The consultants of Tannery & Company Wealth Management are Registered Representatives of LPL Financial a Registered Investment Advisor.  LPL Financial does not provide tax or legal advice.