Walter & Shuffain, P.C.
Certified Public Accountants & Business Advisors
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2010 presents an opportunity for higher income individuals to convert their traditional IRA's (including a SEP IRA or SIMPLE IRA) into a Roth IRA. Prior to 2010, the income limits on both kinds of IRAs have prevented higher income taxpayers from making deductible contributions to traditional IRAs, or a contribution to a Roth IRA. In addition, higher income individuals and married individuals filing separately were precluded from converting a traditional IRA to a Roth IRA. The 2010 rule changes eliminate the income and filing status restrictions that applied to Roth IRA conversions.
Although the income limitation on Roth IRA conversions is permanently repealed, there is a special tax treatment available for 2010 conversions only. Conversion income in 2010 is recognized ratably in 2011 and 2012, unless you make an election to recognize all of the income in 2010.
The tax effect of converting to a Roth IRA remains the same. Taxes must be paid on the converted amount. Accordingly, you should consider how you will fund your tax payment. The ability to spread the tax liability over two years can be advantageous to some and disadvantageous to others. So your tax bracket in each of the years from 2010 through 2012 should be assessed to determine which option would provide the greatest tax benefit.
If you are not a high income tax payer subject to the conversion limit of $100,000 MAGI, you can take advantage of the conversion now, before 2010. Depending on your tax bracket, 2009 may be a better year to convert.
Don't forget another important factor. The tax effect of converting to a Roth IRA remains the same. Taxes must be paid on the converted amount. Accordingly, you should consider how you will fund your tax payment.
If you would like more detailed information, please do not hesitate to contact us.