Completely New Regulations Imply More Men And Women Doing Roth IRA Conversions In 2010
As we near the end of 2010, a lot of individuals have already done Roth IRA conversions, and many others are questioning if a Roth IRA conversion in 2010 is the right move for them.
Why are Roth IRAs in the news so much this year? Before, Roth IRA conversions were restricted to people who earned under a particular income limit ($100,000). A change in the guidelines, effective as of January 2010, removes the income restriction which means more people are allowed to to convert from traditional IRAs to Roth IRAs.
Part of this new rule is the flexibility to pay the taxes from any conversions done in 2010 over a couple of years. Rather than having to pay out the taxes from the conversion all on a single tax return, the IRS is allowing you to pay half in 2011 and half in 2012.
Although the brand new policy may seem too good to pass up, you ought to check out the situation really carefully before jumping into a Roth conversion in 2010. Just because you can convert to a Roth doesn't mean you should do a conversion, at the least not straight away.
Before you decide on whether to convert or not, listed here are a few fundamentals concerning traditional and Roth IRAs you should be aware of:
Traditional IRAs
- Money put into traditional IRAs is tax deductible (income limits apply in case you are covered by an employer sponsored retirement policy)
- Withdrawals from traditional IRAs are actually taxed at your ordinary income tax rate, so in case you are within the 15% tax bracket you'll pay 15% on the amount withdrawn, if you're in the 28% tax bracket you will pay off 28% on any distributions, etc.
- The IRS requires you to take a minimum amount out (primarily based on your age and the account balance) after age seventy 1/2.
Roth IRAs
- Contributions to a Roth IRA aren't tax deductible.
- You may not be allowed to contribute to a Roth IRA if your income is above the limits.
- Qualified withdrawals (have to be at least age fifty nine 1/2 and have had the Roth for no less than five years) aren't subject to income tax.
- In contrast to traditional IRAs, you aren't required to take money out of your Roth IRA once you reach age 70 1/2
Should You Do a Roth Conversion?
You should consider converting to a Roth IRA if:
- You anticipate to be in exactly the same or higher tax bracket once you retire (or when you'll need the funds),
- You will not need the cash you convert for five years or more, and
- You can afford to pay the taxes on the conversion without dipping into your own retirement savings.
It is imperative to note that just because you can convert to a Roth IRA does not imply you need to convert to one. You must consult with a financial or tax professional to determine if a Roth IRA conversion is right for you, since each situation is completely different. A Roth conversion in 2010 might not make sense for you, but a conversion in future years might make sense if tax laws change or your own situation changes.
Completely New Regulations Imply More Men And Women Doing Roth IRA Conversions In 2010
As we near the end of 2010, countless people have already done Roth IRA conversions, and many others are questioning if a Roth IRA conversion in 2010 is the right move for them.
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