Many investors with traditional IRA’s have been unable to convert to a Roth IRA due to income limits and other restrictions.  However, those limits have been lifted in 2010, so investors who have waited for “just the right time” to convert will be able to do so in 2010.

The Time is Right to Convert

There are three compelling reasons to convert a traditional IRA to a Roth IRA in 2010:

1.  The decline in the stock market in 2007 and 2008 means that earnings on a traditional IRA were lower than normal, and consequently less tax will be due at the time of conversion.

• Taxes are due on a Roth conversion because investors were able to deduct the contributions from their taxable income when they were first deposited. The investor’s tax bill at the time of conversion also depends on several other factors, including their income, their federal tax bracket and their state tax rate.

2.  There is a three-year window on paying the taxes due

3.  Income limits are removed

Proceed Cautiously

Converting to a Roth IRA can be beneficial if it is done correctly and with the help of a financial advisor.  Here are a few areas of concern:

• Pay attention to how conversion taxes are calculated, and be aware of your tax bracket.
• Don’t use IRA funds to pay the conversion taxes.  Money that is converted is exempt from penalties, but money withheld to pay taxes isn’t.
• Whatever money you withdraw from your IRA increases your income, and with the increase in income you may experience an increase in Medicare premiums; you could also affect your Social Security income.

The Benefits of a Roth IRA

There are other benefits to converting your traditional IRA to a Roth IRA, including:

• All withdrawals are tax free if you are at least 59 ½ and your account is at least five years old.
• There are no mandatory minimum distributions.
• There is no age limit on contributions.
• There are qualifying exceptions that allow a withdrawal without paying penalties, including medical and educational expenses, disability, and buying a first home.
• Investors gain more control over how funds are invested by choosing the self-directed option
• IRA funds bypass probate to the direct benefit of heirs.

The decision whether to convert to a Roth IRA is a personal decision, and should be done in consultation with family members and a trusted financial advisor.  There is no “one size fits all” answer to the conversion conundrum.  All factors should be considered, including today’s tax rates, anticipated future tax rates, how the conversion taxes will be paid, the size of our estate, and our overall estate plan.

When it comes to investments, you should always be well versed on the rules and guidelines that come with any investment that you make. It is going to be critical to your success and your ability to maximize your profits to know what you can and can’t do, as well as what you should and shouldn’t do. When you’re working with a Roth IRA, one of the hottest topics is Roth IRA conversion. The rules have always been the same, but they are undergoing a big change in 2010 to allow more people to contribute, convert, and enjoy their retirement savings.

continue reading..