Weigh your options for Roth conversions in 2010 by Tim Steffen, financial and estate planning manager at Robert W. Baird & Co.
Starting in 2010, high net worth individuals who earn $100,000 or more will be eligible to convert their traditional IRA to a Roth IRA, an opportunity previously unavailable to them.
The popular Roth IRAs were introduced in 1998 and offer the opportunity for completely tax-free withdrawals, a potentially significant long-term advantage over traditional IRAs that face taxes at withdrawal. Roth IRAs also offer additional benefits because they do not require withdrawals after age 70½ unlike traditional IRAs.
The new rules removing the income restrictions on conversions, adopted as part of the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), also create a one-time tax incentive to make the conversion in 2010. Those who convert next year will be able to defer the income recognition associated with a Roth conversion over the two subsequent years (2011 and 2012). All other conversions in years after 2010 will generate taxable income in the year of conversion.
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