Don’t Convert Your IRA to a Roth…Yet
Converting your traditional IRA to a Roth IRA can be a great idea. You get all the tax-free goodness of a Roth with minimal bitter aftertaste. Well, let me rephrase that. It can be minimal unless you have a ton of money in a traditional. See the thing is, you have to pay taxes when you convert. Essentially you’re ‘withdrawing’ the money from the traditional IRA without the 10% penalty. But the withdrawal is taxed as ordinary income.
The big problem with the conversion from a traditional IRA to a Roth IRA is paying those taxes. They can do nasty things like push you into a higher tax bracket, affect tax credits for stuff like student loan interest, and even trigger the AMT (Alternative Minimum Tax - it’s bad). But here’s the news.
If you convert to a Roth IRA in 2010, you can spread the taxes you owe as a result of the conversion over 2011 and 2012.
This feature is specific to the year 2010. If you do the Roth conversion any other time (like I was strongly considering doing this year until I found this out), this doesn’t apply. That’s kind of OK with me because it gives me time to come up with the money to pay the taxes.
The other thing about 2010 is that the income exclusion on the conversion goes away. As it is, your MAGI (Modified Adjusted Gross Income) has to be below $100,000 to do the conversion. In 2010, anybody can convert to a Roth. Stupidly, that $100,000 rule applies whether you’re single or married. Who writes these rules?
ira roth ira
June 6th, 2007 at 12:50 pm
Also, as currently written, there is no death tax in 2010. For that year alone, families will be able to transfer assets upon death totally tax free. I joke that 2010 is gonna be a bloody year for rich families! I’m goin after Uncle Rockefeller that year!
June 6th, 2007 at 3:37 pm
Yes, by all means, if you’re extremely wealthy and going to die, make sure you do it in 2010.
June 9th, 2007 at 2:54 pm
June 11th, 2007 at 8:56 pm
Wow, thanks for posting this. I knew about the cap being removed but I didn’t realize that you would then be able to spread it out over multiple years. I remember when I did that with my original Roth conversion and it really helped. I’ve added this as a Post of the Day
June 12th, 2007 at 1:26 am