What is the 2010 Roth IRA Conversion opportunity?

For the first time since the Roth IRA debuted in 1998, individuals with an Adjusted Gross Income (AGI) over $100,000 can convert all or part of their Traditional IRA into a Roth IRA. This means that higher wage earners now have the opportunity to convert their current tax-deferred retirement dollars to tax-free status upon retirement.  The conversion may be a good option for those who think they’ll be in a higher tax bracket when they withdraw, don’t see themselves withdrawing funds for at least 10 years, and can pay the taxes due from sources other than the IRA.

When do I pay taxes on the conversion?

You have the option to pay the tax in full in 2010 or to claim 50% of the conversion amount in 2011 and the remaining 50% in 2012 – but keep in mind that this special provision is only for those that convert in 2010.  For conversions after 2010, taxes would be paid in full for the year in which the IRA is converted.  If you decide to convert in 2010 and opt to split the taxes in 2011 and 2012, there are a couple of things you may want to keep in mind— the tax rate you pay would be determined based on your tax bracket for 2011 and 2012, and the current tax cuts are set to expire at the end of 2010.

Can I still contribute after the conversion?

That’s the part that did not change.  The phase out limits still apply when determining whether an individual is eligible to contribute to a Roth IRA for 2010.   Individuals may make a partial or full contribution (up to $5,000; $6,000 for individuals age 50 and over) to a Roth IRA as long as their AGI falls below or within the phase out range.  For single filers in 2010, the phase out limit is $105,000-120,000.  For those filing jointly in 2010, the phase out limit is $166,000-176,000.  Individuals above the limit are not eligible to make Roth IRA contributions.

What if I convert and later decide it wasn’t right for me?

Those who convert and then later change their mind can do a recharacterization. This allows the IRA owner to reverse the conversion completely and can be done until October 15^th of the calendar year after the year the conversion took place. So, if you decide to convert in 2010 you would have until October 15, 2011, to recharacterize.  IRA account holders are not allowed to reconvert back to a Roth IRA within the same tax year or within 30 days of a recharacterization.

Converting to a Roth IRA can get tricky, especially if you have multiple IRAs or only want to do a partial conversion.  That’s why it’s important to discuss this with a tax professional to make sure you fully understand what the tax implications would be for your specific situation.