2010 Roth Conversions May Be Right For You
Prior to 2010, both singles and married couples with a modified gross income greater than or equal to $100,000 were ineligible for Roth IRA conversions. Those who were married and filing separately were ineligible to convert regardless of income. The elimination of income limits on Roth conversions and the anticipated “sunset” of the Bush Administration tax cuts (the reduction in the highest marginal tax rate from 39.6% to 35%) for 2010 may present a window of opportunity for some higher wage earners in 2010. Anybody with an IRA, old 401(k) or other type of retirement plan with a previous employer might consider converting to a Roth IRA. Just for 2010, the IRS has set up a special provision allowing the tax liability on the income to be claimed from the conversion to be spread over two years. You can defer 50% of the conversion amount until 2011 and 50% until 2012. Thus, you may be able to pay lower taxes now than if you were to convert in a later year or wait to pay taxes in retirement. Conversions after 2010 are included in income during the tax year in which the conversion is completed.
How do you decide if a Roth conversion is right for you? If you foresee higher tax rates in retirement or plan on leaving your savings to heirs, a Roth conversion may allow you to pay lower taxes now than if you wait until retirement. Keep in mind that if you choose to take advantage of spreading the income taxes due over a two-year period, the tax rates are determined in 2011 and 2012. Should your income rise in 2012, you can generally expect to pay more in taxes that year.
If you are not prepared to write a big tax check, conversion costs may outweigh the potential benefits. Also consider your time horizon to retirement – if less than five years, amounts withdrawn from the Roth IRA may be subject to a 10% penalty and conversion may not make sense.
AXA Equitable’s Members Retirement Program is a full-service provider of retirement plans designed to minimize the amount of time and money AIA members spend managing their plans. If you are interested in finding out more, call 800-523-1125, ext. 5985 or click on ‘Retirement Plans’ on the Trust web site.