Converting to a Roth

Many people rushed to do Roth IRA conversions in 2010, when the IRS eliminated the income limit.  Under the new laws there is no income limit, which means anyone can convert to a Roth IRA, even if your income is too high to contribute to a Roth IRA.  But that doesn’t mean everyone should rush to convert.

In the following articles we’ll look at the new conversion rules, who should convert to a Roth IRA, what happens to your income/taxes when you perform a Roth IRA conversion, and what to do if you change your mind and want to reverse a conversion you’ve already made.

Should You Do a Roth IRA Conversion in 2010?

Why so much focus on Roth IRAs this year?  It’s simple.  The rules that determine who can convert a traditional IRA to a Roth IRA have been changed to allow more people to convert to Roth IRAs.  Before 2010, only people with modified adjusted gross incomes of less than $100,000 could convert.  Starting in 2010, this income limitation has been lifted, meaning most people are eligible to convert their traditional IRAs to Roth IRAs.

In addition to the income limitation being lifted, the IRS is allowing taxpayers who do a Roth IRA conversion in 2010 to spread their taxes out over two years.  So instead of paying it all on your 2010 tax return, you can pay half in 2011 and half in 2012.

This may seem like a no-brainer for people who want to do a Roth IRA conversion in 2010, but don’t leap before you look.  Just because the income limit has been lifted and the taxes can be spread out over two years does not mean you should rush to convert right now.

Before you make a decision on whether to convert or not, here are some basics about traditional and Roth IRAs you should be aware of:

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