Is There a Conversion in Your Future?

In 2010, previous restrictions on converting traditional IRAs to Roth IRAs will be permanently removed. Anyone who wants to do a Roth conversion may. In addition, the government is going to give a tax deferment on any conversions done in 2010.

For conversions occurring in 2010, 50% or the resulting income will be recognized in 2011 and 50% in 2012. In effect, you will have an interest free loan from the government from the date of conversion to until you have to pay the tax – as late as April 15, 2013.

That said, keep in mind that if income tax rates go up, you could end up paying a lot more tax than planned. I believe it’s likely that the top two tax rates will be higher during these tax years. Alternatively, you may choose to include all the income on your 2010 return to be taxed at the rate in effect for 2010.

In my opinion, a Roth conversion can be a very beneficial strategy for some investors. There are specific circumstances which make it beneficial, and we should discuss and consider if a Roth conversion is a good planning opportunity for you.