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Roth Conversions: Part III Opportunities

With the lure of tax-free distributions, Roth IRAs have become popular retirement savings vehicles since their introduction in 1998. But if you’re a high-income taxpayer, chances are you haven’t been able to participate in the Roth revolution. Well, that has all changed.

What Changed?

In 2006, President Bush signed the Tax Increase Prevention and Reconciliation Act (TIPRA) into law. TIPRA repeals the $100,000 income limit for conversions, and also allows conversions by taxpayers who are married filing separately. What this means is that, regardless of your filing status or how much you earn, you’ll be able to convert a traditional IRA to a Roth IRA.

The Taxing Problem

Deductable contributions to your traditional IRA become taxable if you convert them to a Roth IRA.

Employer Retirement Plans

Before 2008, you couldn’t roll funds over from a 401(k) or other eligible employer plan directly to a Roth IRA unless the dollars came from a Roth 401(k) account or a Roth 403(b) account. In order to get a distribution of non-Roth dollars from your employer plan into a Roth IRA you needed to first roll the funds over to a traditional IRA and then (if you met the income limits and other requirements) convert the traditional IRA to a Roth IRA. The Pension Protection Act of 2006 streamlined this process. Now, you can simply roll over a distribution of non-Roth dollars from a 401(k) or other eligible plan directly  to a Roth IRA.  You’ll still need to pay income tax on any taxable dollars rolled over.

Is a Roth Conversion Right For You?

The answer to this question depends on many factors, including your income tax rate, the length of time you can leave the funds in the Roth IRA without taking withdrawals, your state’s tax laws, and how you’ll pay the income taxes due at the time of the conversion. And don’t forget–if you make a Roth conversion and it turns out not to be advantageous, IRS rules allow you to “undo” the conversion (within certain time limits). We will discuss this in more detail in a future post. Also look for future posts detailing specific reasons and circumstances that could make “converting” your best option.  A qualified financial professional can help you decide whether a Roth conversion is right for you, and help you plan for this exciting new retirement savings opportunity.

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