What a boring looking topic. But Roth IRA conversions from regular IRAs are hot news this year for several reasons. First because of a one year special income tax smoothing on the amount converted from a regular IRA to a Roth IRA in 2010. What this means is that instead of paying income tax in 2010 on the entire amount converted from a regular IRA to a Roth IRA in 2010, you can elect to pay income tax on one-half of the 2010 conversion amount in 2011, and pay income tax on the other one-half of the 2010 conversion amount in 2112. Or you can simply elect to pay the tax on the whole amount in 2010 as you normally would have to do. Decisions on this tax election will of course depend on various personal factors including projected taxable income and estimates of tax brackets in 2011 and 2012 and depending possibly on some of the considerations below.
Regular IRA to Roth IRA conversions are also in the news this year because beginning in 2010, and possibly beyond 2010, there are no limits on the dollar amount of a regular IRA that can be converted to a Roth IRA. Until 2010 one could not and cannot convert to a Roth IRA if your modified adjusted gross income exceeded $100,000, so removing the income limits will be a big advantage for higher income taxpayers with large IRA balances. Also, of course, it's also a great benefit for the IRS since it will speed up their tax collection on tax-deferred IRA balances.
I've recently read quite a few retirement specialists, including several who have written books on Roth IRAs and/or who have subscription-based retirement newsletters. Most of them do not write clearly on the issue of potential taxes or penalties on some Roth IRA distributions. The main reason for a Roth IRA in the first place is that future earnings or gains in a ROTH IRA will not be taxed either in the Roth IRA or when withdrawn. So to hear confusing inforamtion that some distributions can be taxed is off-putting to say the least. I was confused by this for some time.
There are two types of legally permissible non-taxable distributions from Roth IRAs: "qualified" and "non-qualified". "Qualified" distributions were the original basic plan of Roth IRAs. If you hold your Roth IRA contributions in the Roth for five years and you are 59 1/2 years old or older, you can then withdraw whatever you like and pay no income tax or penalty. Period.
"Non-qualified" non-taxable distributions are possible due to several legally defined exemptions from income taxation and penalties if you are either under 59 1/2 or haven't held the assets five full years or both.
