Lets Talk Money Online - A window of opportunity for Roth IRA conversions

If you own a traditional IRA, you have a special, one-time opportunity this year. In the past, you could convert from a traditional to a Roth IRA only if your income was $100,000 or less. That income requirement no longer exists. Beginning in 2010, you get the chance to convert to a Roth regardless of your income level. And for 2010 only, you can elect to defer including the amount in income until 2011 and 2012. Is converting to a Roth IRA right for you?

One factor to consider is that you must pay income taxes on the taxable portion of the amount you convert. The taxable portion includes any tax-deductible contributions you previously made and growth on your account balance. And if you pay taxes from the conversion amount and are younger than age 59½, you might incur a 10% federal income tax penalty. So you may have to find the money to pay taxes on the conversion amount elsewhere.

The good news is that you get two tax years to pay the income tax on the conversion, 2011 and 2012, so you get until your tax filing deadlines in 2012 and 2013 to come up with all the money, unless you elect to take all of it as income in 2010.

Should you convert? Perhaps, if you think your income tax bracket will be the same or higher in retirement as it will be, or was, in your final working years. This takes on added importance if you think an increase in federal income taxes is in the cards.

There are other reasons you might consider converting to a Roth IRA. If you have other retirement accounts, you may not need to take distributions from all of your accounts. Most retirement plans require you to take minimum distributions starting at age 70½, but not the Roth IRA. You never have to take a distribution from one.

More important, the Roth IRA has one advantage that no other retirement plan has. You can take withdrawals income tax free after you reach age 59½ if you meet a five-tax-year qualification period. Your first tax year begins January 1 of the year you make your first contribution. This particular feature puts more money into your pocket, regardless of what happens with future income tax rates.

Ultimately, you will want to work with a financial professional and your tax advisor and look at your other retirement income sources to determine whether a Roth IRA conversion is right for you. If it is, you may never see a retirement income opportunity like this again.

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