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Roth IRA Conversions for 2010 Planning

Increasingly, our Massachusetts clients have been asking about conversion strategies between the traditional IRA and the Roth IRA. All monies invested in a traditional IRA are taxable upon distribution to you. That is, whatever you take out of the IRA will be a taxable event and a 1099 will be issued. On the other hand, whatever you withdraw from a Roth IRA is not taxable; this is because you already paid taxes on the amount deposited in the year you made the contribution.
Now, however, there is a planning opportunity for folks with monies in a traditional IRA. If the “modified adjusted gross income” on your 2009 tax return will be less than $100,000, you can “convert” an unlimited amount of your investments in your traditional IRA to a Roth IRA. You will have to pay taxes on the “distribution” and most tax advisors recommend using separate funds to pay those taxes. Nevertheless, the monies can now be invested to grow, tax free to you and your heirs. Thus, as a tax planning mechanism, you can take distributions from the Roth IRA when the tax on traditional IRA would be prohibitive.

In 2010, this opportunity becomes available for people of all income levels. This is a result of the 2005 Tax Increase and Reconciliation Act. Thus, in 2010 you can “convert” an unlimited amount of traditional IRA monies to a Roth IRA regardless of your income. Again, be careful of taxes as the conversion is a taxable event; and check with your tax preparer to be sure this is a wise decision for you.
For long term financial planning, this is a very helpful tool. You can use it in retirement planning as well as estate planning. This is because the Roth IRA can be left to your heirs tax free; there is no estate tax on Roth IRA inheritances and, unlike traditional IRAs, there is no requirement as to when your heirs must take distributions.