Roth IRA Conversion Rules Changing – Have You Reviewed Your Tax Plan – Part I

October 7, 2009

There has been much in the news lately about the January 1, 2010 change to the rules surrounding the conversion of ROTH IRAs. I am going to write a short  long series of posts that will explain the rules around Roth IRAs, as well as what the recent changes in the law means. I will also provide you with some reasons to convert, as well as some reasons not to convert. In addition, my final posts will include some tax planning tips around the Roth IRA.

Part I:  What is a Roth IRA? What is changing about Roth IRA Rules?
Part II:  Reasons to Convert to a Roth IRA.
Part III:  Reasons NOT to Convert to a Roth IRA.
Part IV:  Planning Ideas around Converting to a Roth IRA.
Part V:   More Planning Ideas – What is this Pro-Rata Rule?

What is a Roth IRA? First, let me assume that at least a few of you are unfamiliar with what a Roth IRA even is. The biggest different between a traditional IRA or retirement vehicle (such as a 401(k), and a Roth is that traditional IRAs typically allow the taxpayer to deduct the contributions against income when they contribute them. In turn, those taxpayers will pay taxes on those funds when they remove them during retirement.  With a Roth IRA, taxpayers pay their taxes on those earnings now, and under current law would pay no tax upon withdrawal of those funds.

In order to contribute the maximum amount allowed to a Roth IRA in 2009, individuals must have a modified AGI less than $120,000.  Married couples filing jointly or a qualifying widow(er) must have a modified AGI less than $176,000 to make their maximum contribution.  The maximum contributions begin to be phased out when those income limits reach $105,000 and $166,000, respectively.

The maximum allowable annual contribution to a Roth IRA is $5,000 annually for 2009 if you are under age 50.  If you are over age 50, the maximum contribution is $6,000 for 2009.  Starting in 2010, these amounts are going to be indexed to inflation.

What is changing about Roth IRA Rules?  As part of the Tax Increase Prevention and Reconciliation Act of 2005 (signed my President Bush on May 17, 2006), the $100,000 income limit for converting certain retirement plans to Roth IRA’s has been “permanently” removed. This means that regardless of your income, you can now convert your qualifying retirement assets to a Roth IRA. Because Roth IRA conversions create immediate income tax revenue for the government, it is unlikely that the Obama administration is going to push to put the limits back in place.

In addition, married couples who file separate tax returns can also convert to Roth’s. Prior to the January 1, 2010 rule change, these individuals would have been prevented from doing so except under certain circumstances. What types of plans can you convert to a Roth IRA?

You can convert all of part of the assets from your own or an inherited employer-sponsored qualified pension, profit sharing or stock-bonus plan, such as a 401(k), 403(b) annuity plan or a government deferred compensation plan, such as a section 457 plan. You may also convert your own, but not an inherited SEP-IRA or SIMPLE IRA, although you must hold a SIMPLE IRA for at least 2 years from the date of establishment to convert to a Roth IRA.

Donna Bordeaux, CPA with Calculated Moves

Creativity and CPAs don’t generally go together.  Most people think of CPAs as nerdy accountants who can’t talk with people.  Well, it’s time to break that stereotype.  Lively, friendly, and knowledgeable can be a part of your relationship with your CPA as demonstrated by Donna and Chad Bordeaux.  They have over 50 years of combined experience as entrepreneurial CPAs.  They’ve owned businesses and helped business owners exceed their wildest dreams.   They have been able to help businesses earn many times more profit than the average business in the same industry and are passionate about helping industries that help families build great memories.