Roth Conversion Limitations Eliminated

Beginning in 2010, legislation:

(1) Eliminates the $100,000 modified AGI limit on conversions of traditional IRAs to Roth IRAs, and

(2) Permits married taxpayers filing a separate return to convert amounts in a traditional IRA into a Roth IRA. Under prior law, married taxpayers who filed separate returns were restricted from making conversions.

In addition, for conversions made in 2010, the taxpayer can choose to elect to:

a. Include the income in the 2010 return, or
b. Include one-half of the conversion income in 2011 and one-half in 2012.

Note: 2010 is the last year for the current “low” tax rates unless Congress extends them in future legislation. Thus, using the option to include the income in 2011 and 2012 may not be a good option for taxpayers that may be subject to the increased tax rates after 2010.

• Strategy – Generally, rollovers are thought of as transfers from a qualified plan to an IRA or from one IRA to another IRA. However, beginning in 2002, the law has allowed an IRA to be rolled (or transferred) to other qualified plans including 401(k) plans, 403(a) and 403(b) annuities and 457 governmental retirement plans (assuming the plan will accept the IRA funds). In addition, the law only allows the taxable portion of the IRA to be moved to qualified plans. For taxpayers who have mixed IRAs (including both deductible and nondeductible contributions), this provides a means to segregating the taxable and nontaxable amounts and then later converting the nontaxable portion without paying any conversion tax (except on any interim earnings). Thus, the taxable portion can be rolled into a qualified plan, leaving the nontaxable portion in the IRA where it can be converted to the Roth IRA.

The amount of tax imposed on a Roth conversion will depend on a number of issues including the taxpayer’s marginal tax bracket, intended conversion amount and whether or not the conversion is made in one or multiple years. Also a factor is whether the taxpayer made deductible IRA contributions in earlier years in addition to the nondeductible contributions intended for rollover to the Roth. All of the taxpayer’s regular, SEP and SIMPLE IRAs have to be combined when determining the amount that is taxable upon conversion, so there could be unintended taxable consequences. Minimizing the conversion tax requires careful planning and strict adherence to the conversion rules.

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