Roth IRA conversions open the door for all income levels

By Jeffrey Smith

The Roth IRA, originally established as an attractive retirement savings vehicle for middle-income Americans, has been out of reach to high-income earners until now. But under a new provision beginning in 2010, investors can convert retirement plans and IRAs to Roth IRAs. This means that even high earners who convert to Roth IRAs will benefit from the tax-free withdrawal benefits the Roth IRA offers.

For the first time beginning January 1, 2010, people earning a modified adjusted gross income over $100,000 will be able to convert any amount of their traditional IRA assets to Roth IRAs. Investors in Roth IRAs pay income tax on the money they invest now and withdraw it tax-free in the future -- the reverse of the traditional IRA structure.

For 2010 Roth conversions only, those who convert will also be able to spread their upfront tax payments over 2011 and 2012. For all these reasons, Roth IRAs should definitely find their way back into affluent investors’ toolkits.

There is ample reason to consider a Roth conversion and to discuss this notion with your own tax advisor. Roth IRA affords certain advantages to eligible investors:  tax-free withdrawals, tax-free growth, no minimum distribution requirements and estate planning benefits. Instead of claiming a tax deduction from current income in the year you contribute, a Roth IRA offers tax-free withdrawals on the back end, as long as you meet certain requirements.

It is important to understand what these changes mean in your own financial situation: while the conversion from a traditional to a Roth IRA is open to anyone regardless of income or filing status, new contributions continue to be capped by income for those who make direct contributions.  The income threshold for a full contribution for 2010 is $105,000 for single persons and $167,000 for married persons filing jointly. For a reduced contribution, the income threshold is $120,000 and $177,000, respectively.

Both traditional IRA and rollover IRA assets are eligible for the Roth IRA conversion. A conversion creates taxable income for the year in which it takes place; however, in 2010, investors will be permitted to split the conversion tax amount over two years, 2011 and 2012.

Unlike a traditional IRA that requires withdrawals beginning at age 70-1/2, funds may grow tax-deferred in the Roth IRA indefinitely or be withdrawn on your own schedule.  Another attraction of the Roth conversion for affluent investors is that it can reduce the size of one’s taxable estate. The account can be kept intact and passed on to your heirs income tax free. 

There are many factors to think through before you convert an IRA to a Roth IRA or invest in a Roth, and investors are advised to consult with a financial advisor to evaluate this investment option. Work with your advisor to learn more and to take steps to take advantage of this opportunity in 2010.    

About the Author
This article was written by Wells Fargo Advisors and provided courtesy Jeffrey S. Smith.  Jeffrey, Vice President-Investments, Senior Institutional Consultant with Wells Fargo Advisors, has over 15 years experience as a financial advisor, and is dedicated to helping his clients meet their financial goals. Jeffrey is a Certified Investment Management Analyst℠ professional (CIMA®), and a member of the Investment Management Consulting Association (IMCA). He can be reached at jeffrey.smith5@wfadvisors.com and his website is www.jeffreysmith@wfadv.com
 at 727-551-2302

Wells Fargo Advisors does not render legal, accounting, or tax advice. Be sure to consult with your own tax and legal advisors before taking any action that may have tax consequences.
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