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Roth IRA Conversion Changes

– February 2010

A provision in the Pension Protection Act of 2006 has created a potential opportunity for many IRA owners. In 2010, taxpayers with a Modified Adjusted Gross Income above $100,000 will be able to convert their Traditional IRAs and other qualified accounts to a Roth IRA for the first time. This presents a significant opportunity for high-income individuals to diversify the taxation of their retirement assets.

What is a Roth?

A Roth IRA differs from a traditional IRA and other qualified retirement plans in that contributions are made with after tax dollars but withdrawals are tax free (assuming made after age 59 1/2). Also, there are no mandatory distributions from Roth IRAs once the taxpayer reaches age 70 1/2. Therefore, the funds in the IRA can be left to grow tax free for an extended period of time.

Considerations

Below are some of the major 2010 conversion considerations.

1. You must pay tax at your ordinary income tax rate on all pre-tax contributions being converted. If you made contributions to your Traditional IRA with after-tax dollars, those amounts are not subject to income tax.
2. For conversions made in 2010, you may elect to spread the income realized from the conversion equally over 2011 and 2012, which in turn allows you to defer the tax burden.

Who Can Take Advantage?

Converting to a Roth IRA is not right for everyone, but we have highlighted several situations that may present a good opportunity.

1. You earn over $176,000 (Married Filing Jointly) or $120,000 (Single), maximize retirement plan contributions and would like to save more for retirement.
2. You currently have an IRA and if so, is it small.
3. You have a long investment horizon.
4. You will not need your IRA assets in retirement.
5. Ask your accountant if you have a favorable tax situation (large deductions, NOL, Tax credits, charitable contribution carryover, conservation easement).
6. You would be interested in diversifying tax treatment of retirement assets.
7. Your IRA has a high cost basis such as a non-deductible IRA in which you made after-tax contributions.

What Next?

Although many have promoted this conversion opportunity as something everyone should take advantage of, an IRA conversion to a Roth is not appropriate in all circumstances. Each individual�s situation is unique, and we encourage you to contact your advisor at Warren Averett if you are interested in learning more.

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To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication is not intended or written to be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii), marketing or recommending to another party any transaction or matter addressed herein.