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More Roth Planning for 2010 and 2011

We are advising our Massachusetts clients to look into a loophole in the tax code for Roth IRA conversions in 2010.
The tax code has been amended to allow folks to do a reverse Roth IRA conversion in 2010. Here is how it can be executed:


First, you have during the year of 2010 to convert a traditional IRA to a Roth IRA. Be careful, there is a tax consequence here in that the entire amount converted is taxable income. You should pay the taxes out of savings or earnings outside the IRA and Roth IRA. However, once converted, the Roth can grow and all withdrawals are tax free. With the new twist in the tax code, you may convert back to a traditional IRA before October 15, 2011.
 
Thus, if the monies in the Roth IRA grow significantly before October 15, 2011, you should leave them in that Roth IRA, protected and tax free. However, if your investments in the Roth IRA decrease, you may convert back to the traditional IRA, pay the tax on the reduced value, and then, after 30 days, convert back to the Roth IRA.
 
Be sure to check your tax rates so the tax on the converted monies does not bump you into a higher tax bracket.