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Financial Planning Newsletter• Nov 18th 2009 

Financial Planning Newsletter

This month: More on the 2010 Roth Conversion

We touched on the Roth conversion a couple of months back, however as we get closer to 2010 there is going to be more chatter about this special opportunity. So in this month's newsletter we will explore the Roth Conversion rules for 2010 to see if it is right for you.

Recaping the Roth IRA:

Let's review a few basics regarding the Roth IRA:

- unlike a traditional IRA (or rollover IRA) where all distributions are taxable, the Roth allows for "tax-free" distributions in retirement.

- also unlike a traditional IRA a Roth does not have a requirement for RMD's (required minimum distributions that the IRS makes you take from a traditional IRA starting at age 70 1/2)

- all contributions are "after-tax", meaning that you don't get any deductions for contributing to a Roth.

- The Roth IRA does have specific income limits to determine eligibility for contributing and/or converting. The income limits in 2009 for making a Roth contribution is $105,000 for single tax filers and $166,000 for married tax filers. Over that amount and you phase out of eligibility.

- Up to 2010 the eligibility limit on doing a Roth Conversion has been only those making less than $100k AGI.

- To get the "tax free" treatment on distributions they must be "qualified" distributions: The Roth IRA must have been established a minimum of 5 years prior to the distributions and the owner must be over age 59 1/2.

What changes in 2010 with the Roth?

Next year as the law is currently written (subject to change at anytime) the income cap on Roth CONVERSIONS will disappear for one year. This means that all you high income earners that never qualified for a Roth will be able to take an old IRA or 401k and convert it into a Roth IRA. (Please note that the income caps for contributions stay in place, this special one year rule is for conversions only). A Roth conversion means that you recharacterize the current IRA or 401k into a Roth IRA, the amount that is converted will be includable in your taxable income and taxes will be due at your ordinary income tax rate. The benefit is that all future growth will be completely tax free!

One more special treat: the IRS has included one more perk for folks wanting to convert, they will let you spread the tax payment for the conversion over 2 years (ie: 50% of taxes due on April 2011 and 50% of taxes due on April 2012).

Who should convert?

(Fair disclosure: this is not advice, if you have questions find yourself a good financial planner and ask them to run an analysis based on your particular situation!)

Rules of thumb for folks contemplating converting:

- If you are a high income earner that doesn't have a Roth you are a prime candidate.

- You need to have an old IRA, or 401k from a previous company. If you don't then you have nothing to convert.

- You should ideally be able to pay the taxes due with other monies. (if you have to take money from the IRA to pay the taxes due then it's probably not a good idea)

- You should probably have a span of 15 years or more until retirement so that the compounding features make it worth your while to convert.

- if you are already retired it doesn't make a lot of sense unless you just have money to burn or you are planning on leaving this Roth to someone as part of an estate strategy. (you won't enjoy the tax free benefits but your beneficiary sure will!)

Of course these are simple rules of thumb and a more detailed analysis should be considered if you are contemplating doing a conversion. Below is a link to a quick calculator I found on the Smartmoney website that will give you an idea if conversion make sense for you:

SmartMoney Roth Calculator


James A. Daniel,

This newsletter if for informational purposes only. The information contained within should not be considered as financial advice nor soliciation for financial services. Consult with your financial professional if you have any questions.

The Advisory Firm, LLC is a fee-only financial planning company and registered investment advisor.

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