Earlier this year I
wrote several blog posts on Roth IRAs and/or simple close-outs of existing regular IRA retirement plans.
Roth IRA conversions have several new advantages beginning in 2010. The main advantage for people with large IRA balances and incomes over $100,000 per year is that the earned income limit is waived for 2010 and perhaps later. So even very large IRAs can be converted upon payment of the income tax on the amount converted.
A second very important 2010 advantage for all income levels is that the income tax owed on the conversion in 2010 can be paid one-half in 2011 and one-half in 2012. This entails some risks and means that one must be sure the money needed to pay the tax is safely available when needed in 2011 and 2012, but it can be a big tax-saver to spread the tax over two future years with no IRS interest charges on the tax deferral.
As the end of year grows closer there have been some better articles on Roths and 2010 opportunities. This past week Robert Powell of MarketWatch wrote a very short and good
summary .
Powell lists several websites with calculators to give us ideas on the wisdom of converting versus doing nothing. A lot depends on how long the Roth will exist and what the estimated rate of return will be. For a decade or less of Roth existence the outcomes for income taxes taxes are virtually the same for regular IRA or Roth conversion.
But there are other advantages to Roth IRA conversion which are very well decribed by two Roth IRA experts whom Powell refers to. I would read this
article before even going to the calculators to see if your reasons for wanting or not wanting to convert really add up.
One last advantage of Roth IRA conversion is that you can back out of it and get your tax back up until October 15th of the year after you convert. Ed Slott, the IRA expert, calls this betting on the horserace after it's over. Let's suppose you want to put gold coins into your new Roth IRA because they will not be taxed when they are removed in the future. But if gold goes way down in price after you start the Roth IRA you have up to 22 months to "recharacterize" or reverse the Roth IRA conversion and get your full tax back. If gold goes way up instead you are way ahead. By October 15 of the year after conversion you'll know which horse won and can act appropriately.
There are a lot of issues to consider, including estate planning, death taxes, and much more, but the advantages under certain conditions warrant taking a good look while so many advantages still exist.
