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Monday, December 27, 2010


By JC Leahy, MA Accounting
Maximum Legal Refund (TM)
Income Tax Preparation & Consulting
Silver Spring, MD 
Tel. (301)537-5365

Personally, I think that 2010 may come to be called the Year of the Roth Rollover. If you have a traditional IRA, you really ought to make yourself aware of some big changes that happen January 1. These changes result from 2 laws passed by Congress during the Bush administration, and they may help you as you struggle tobuild a secure retirement.

Here’s the "Roth Conversion" deal  in 2009, before the changes: If you wanted to convert funds from a traditional IRA to a Roth IRA and your 2009 tax return shows a "modified adjusted gross income" of $100,000 or more -- you were prohibited. If you’re married and filing a separate return from your spouse, you were prohibited. If you weren't affected by these 2 prohibitions and you, indeed, converted funds from IRA to Roth IRA, every single dollar converted added a dollar to your 2009 taxable income and thereby increased your 2009 income tax liability.

Fast forward to January, 2010. The $100,000 income prohibition and the married-filing-separate prohibition both disappeared! Poof! Furthermore, any amount you convert from IRA to Roth IRA in 2010 may not add a dime to your 2010 taxable income. You actually have a choice. Either pay taxes on the full amount in 2010 or pay taxes on zero. If you chose the latter, then you will have to split the additional income between your 2011 and 2012 tax returns. This amounts to a two-year interest-free loan from the government. What a deal!

So, why would you want to have a Roth IRA rather than regular IRA in the first place? Well, provided you follow the rules, your Roth IRA earnings will never be taxed. You won’t be prohibited from making Roth IRA contributions when you turn 70.5 year of age. And there are no mandatory withdrawals when you turn age 70.5.

These wonderful changes result from provisions of two Bush-era laws just now taking effect. These are the Tax Increase Prevention and Reconciliation Act (TIRPA) of 2006, and the Economic Growth and Tax Relief and Reconciliation Act of 2001 (EGTRRA).

If you have money in a traditional IRA, 2010 certainly looks like the year to think about making a Roth conversion. Check with your tax advisor.
2010 IRA (Roth and Traditional) Contribution Limits
Year AGE 49 and BELOW / AGE 50 and ABOVE
2002-2004 $3,000 / $3,500
2005 $4,000 / $4,500
2006-2007 $4,000 / $5,000
2008 $5,000 / $6,000
2009 $5,000 / $6,000
2010 $5,000 / $6,000
The above limits do not apply to Roth IRA conversions.


JC Leahy said...

from the e-mail box:

Happy New year,

That was a very beneficial read on Roth IRA conversion. I had no idea.

Bertha, Maryland

Anonymous said...

This was the best thing I read on the internet as I struggled with the decision of what to do. I converted, and will repay in 2011-12 and take the free loan! Many thanks, Michael Senko Ambassador, ret.) Long and Foster Real Estate, Inc. tel. 202 257 5787