Congress Passes New Provision Surrounding Roth IRAs, Impacting Baby Boomers

Jan. 29, 2010 - PRLog -- Changes in Roth Conversion for 2010

SACRAMENTO, Calif. Jan. 22, 2010 – What you need to know about Roth conversions; in 2010 the $100,000 income threshold lifts for ROTH conversions, but the rules surrounding Roth IRAs are complicated with serious tax and income implications for the unschooled.

Keith Springer, Founder and President of Capital Financial Advisory Services in Sacramento, California, explains, “why Congress now allows high-income individuals to convert a Traditional IRA to a Roth beginning in 2010.”  

Congress wanted to keep the cost of the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) under $70 billion, during the 10-year budget window, in order to prevent a point of order or filibuster. As a revenue offset, Congress inserted a provision allowing high-income taxpayers to convert to a Roth beginning in 2010, with anticipated tax revenues of $6.4 billion.

According to analysis by the Tax Policy Center, this $6.4 billion windfall will cost the government $14 billion in future tax revenues in present-value terms. In the aggregate, Americans will spend $6.4 billion to save $14 billion.

“One of the most underappreciated benefits of Roth IRAs is that there are no minimum distribution requirements during the Roth holder's lifetime,” continues Springer. “People who have not yet reached age 70½ may not fully understand the power of this benefit. But when they start having to pay taxes on income they don't need, they may wish they had converted to a Roth earlier, when the account was smaller and the taxes were lower.”

Converting to a Roth IRA eliminates the need to take unwanted taxable distributions and allows the account to grow tax free well into your 70s, 80s, or 90s.

The $100,000 income limitation does not apply to individuals converting to a Roth. Income is reported over two years, beginning with the 2011 tax year. Meaning a conversion in 2010 would be required to only report half the income on your 2011 return (paying the taxes by April 15, 2012) and the second half on your 2012 return (paying the taxes by April 15, 2013). The conversion itself would be reported in 2010 using Form 8606, but none of the income is reported for that year unless you opt out of this special rule.

For more information on timing a conversion, partial conversions or converting a 401(k) or a 403(b) to a Roth IRA visit www.KeithSpringer.com, email Keith@KeithSpringer.com or call (916) 925-8900  

Keith Springer is an SEC Registered Investment Advisor who frequently provides commentary and analysis for various global and national media outlets. He has developed a proprietary process for successfully building tax-efficient retirement portfolios and has been providing specialty wealth management services for over 25 years.