2010 Roth Conversion

from

"Starting in 2010, the existing $100,000 income test for converting a traditional IRA to a Roth IRA will no longer apply. Conversions that occur in 2010 will be able to have half of the taxable converted amount taxed in 2011 and the other half taxed in 2012."*

It can be of a benefit to you in that if you put $4000 ($5000 if you are

50 or older) into a nondeductible IRA for 2006-2009, you will have $16,000 or more plus the earnings. At conversion in 2010, only the earnings would be subject to income tax, and the gains are spread over two years.

Note: For any readers who have IRA deposits which are pretax, the conversion rules require you to prorate your entire IRA balance to calculate what is taxable at conversion. e.g. If you made $10K in pretax deposits, and $20 in non deductible deposits, and the account is now worth $50K, 80% of Roth conversion would be taxable (10/50 = 20% is not taxed). This is a general remark, not to the OP.

*I also wonder how much confusion will ensue as those who wanted to make their annual conversion find their tax preparers trying to claim the tax in a later year, when the client wanted the 2010 conversion taxed in the year it was converted. H.R.4297 states "unless the taxpayer elects not to have this clause apply". So one can continue with their annual plan, if that's their choice.

JOE JoeTaxpayer.com

Currently, the tax rules are such that you can only do a Roth conversion on a traditional IRA if your other income is less than $100K. The limit is the same $100K for a married couple as for singles. That limit is going away entirely in 2010. So, if you're making too much money to do a Roth conversion now, you'll be able to do so in another few years. And, if you're making too much money to make a Roth contribution now, you can make a nondeductible contribution to a traditional IRA now, and Roth convert it after 2010.

Generally, most 401(k) plans don't allow you to do a rollover to an IRA unless you quit your job or retire. But if you have money sitting around in old 401(k) accounts from former employers, you'd become eligible to Roth-convert those moneys in 2010 even if you can't do so now.

Being eligible to do a Roth conversion doesn't necessarily mean it's a good idea! It only makes sense to convert an amount that you have enough cash from other sources to pay the taxes on, and that doesn't bump you up into a higher tax bracket.

Here's an article that explains some of the implications of the change. It also has a big warning that Congress might vote to change the law again before it even takes effect.

-Sandra the cynic

So many of the tax laws passed in the last six years "sunset" in the next four years that I'd be surprised if there are not major tax changes in the next (2009) Congress if the parties in power change.