Converting to a Roth IRA Can be Beneficial in 2010

Beginning January 1, 2010, the $100,000 adjusted gross income (AGI) limitation on Roth IRA conversions has been eliminated, making it possible for virtually all taxpayers eligible to convert from a tax-deferred 401(k) or Traditional IRA to a tax-free Roth IRA.

What makes converting advantageous this year are the several unique options you have to structure the conversion. Because you have to pay taxes on the amount that is being converted, you have two options for paying the amount owed. Either you can pay the entire amount due on your 2010 individual tax return or you can split the tax amount owed in equal 50 percent portions on your 2011 and 2012 returns. Another nice feature is, if the value of your account decreases after the conversion you are able to move your money back to your original retirement plan without having to pay any taxes, so long as you do so by the due date of your 2010 return, including extensions.

Other benefits of converting and having a Roth IRA are that all distributions are tax free after five years of owning the IRA and after age 59 1/2. Additionally, there are no required minimum distributions once you reach age 70 1/2, and your beneficiaries can inherit the account and keep the tax-free status.