Did you know that starting this year (2010) you have the option of converting your traditional IRA account to a Roth account? So what is the advantage of a Roth, you ask? With a Roth IRA, you pay taxes on your income before you deposit it, so that means you can withdraw it tax-free in retirement.
The Pros
Retirees can avoid making mandatory withdrawals with a Roth. Another tax great advantage is that your heirs can inherit a Roth IRA without having to pay the income taxes, unlike traditional IRAs.
The Cons
The big downside is, if you convert your traditional IRA to a Roth, you will have to pay the taxes (report as income) on the converted funds. Experts say, unless you have the funds on hand to pay the taxes (not using your IRA funds to pay the taxes), it isn’t worth the benefit. A short-lived advantage is that in 2010 only, a taxpayer may report the income from the conversion in 2010 or choose to spread the income equally over 2011 and 2012.
Minimizing the Taxes for Conversion
To minimize the impact of reporting the income from an IRA conversion, charitable deductions can offset the conversion income on a dollar-for-dollar basis. You can help minimize taxes that would otherwise be due, and fulfill your charitable goals! A Donor Advised Fund is a great tool to use in this case. You can set up a Donor Advised Fund, take the tax deduction now, and make your charitable grants later. Click here for more information about Donor Advised Funds.
Even if you don’t convert, it is a great time to open a new Roth account. You are eligible to open a Roth if: You are single with a modified adjusted gross income of $120,000 or less, or married making $176,000 or less in 2009.
Remember, if you deposit money in a Roth or traditional IRA before April 15th, you can count any contributions toward your $5,000 limit for 2009 and $5,000 for 2010 on your income taxes.
As always, individuals should consult with appropriate advisors before deciding to convert a traditional IRA to a Roth IRA.
Click here for more information and rules pertaining to IRAs.
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