Plan now to make most of 2010 Roth conversion rules

Gazette, The (Colorado Springs), Aug 29, 2007 by MONEY MANAGEMENT DAN SERRA

For retirement savers looking to convert a traditional IRA to a Roth IRA, patience will pay off. In 2010, the rules change for conversions, and until then there are a few things savers can do to prepare.

The big winners in 2010 will be taxpayers with incomes above $100,000. Currently, they can't even convert to a Roth. If a taxpayer's annual adjusted gross income is also too high for contributing either to a traditional or Roth IRA (more than $166,000), he or she can make nondeductible contributions to a traditional IRA up to the annual limit ($4,000, or $5,000 if 50 or over). Then, in 2010 and every year after, when the $100,000 income limit for converting to a Roth is removed, a conversion will be allowed.

Since taxes were already paid on the nondeductible portion, they won't have to be paid again when converting, except for gains over the amount invested. Only IRA funds that were previously deducted would face full taxes when converted to a Roth; however, the tax bill on the amount converted in 2010 can be spread over three years.

There is no limit to the amount that can be converted, but those age 701/2 or older must take the annual required minimum distribution, which is taxable, from a traditional IRA before converting.

The big advantage of converting in 2010, even for those with income under $100,000, is it is the only year the IRS will allow spreading out the taxable conversion across three years, points out Bernie Benyak, a tax manager at Stockman Kast Ryan and Co. in Colorado Springs. So converting a $90,000 traditional IRA will result in paying taxes on $30,000 in 2010, 2011 and 2012.

Another option is to park the money in a taxable account where the gains are taxed at a lower rate now than at conversion, Benyak suggested. But if it's invested in a mutual fund, taxpayers should make sure the payouts are not in short-term gains, which are taxed as ordinary income. Morningstar or investment professionals can help weed out those funds.

"A lot of times, with dividends currently being taxed at 15 percent, there's an argument people are better off funding a taxable account so they are only paying 15 percent tax," Benyak said. In addition, tax rates in 2010 are a big unknown, so there's a chance your tax bracket could be higher, or the lower 15 percent capital gains tax could disappear.

Finally, Benyak suggests looking for opportunities to convert in any year when your income drops, such as after a job loss or business loss, making sure a conversion doesn't trigger the alternative minimum tax because of a higher taxable income.

Contact the writer: dan.serra@gazette.com. Not all

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