The Roth IRA Conversion Opportunity

In addition to providing information regarding planning topics, it is our mission to make it ACTIONABLE. That is why this next article may be one of the most important we pen this year. (We think our other may have been regarding the timing opportunity for 529 plans.) What is up, you say? Well, under the Tax Increase Prevention and Reconciliation Act of 2005, all taxpayers will be able to convert all or some of their traditional IRAs into a Roth IRA, REGARDLESS OF INCOME.

Now, instead of being faced with an "unhelpful" income cap on who could avail themselves of the chance to pay taxes now as a way to avoid paying more taxes later, anyone can do so, and that is big, big news. So much so that the entire financial planning industry is gearing up for this opportunity. For you out there with significant IRA assets, and a connection to a financial advisor or planner, steel yourself to the fact that many phone calls and letters will be coming to advise you of the opportunity and how it relates to your savings and retirement goals as well as legacy planning. Just watch.

Do we think the information deluge to come is misplaced? Absolutely not! As we said, we think this will be one of the most important pieces we write this year. But we also think you'd be well served with answers to some of the most frequently asked questions about Roth IRA conversions before the storm hits. Just imagine this as a pre-emptive strikeof sorts.

Prior to 2010, the amount converted would be reported as income on that year's tax return. Under TIPRA, however, conversions done in 2010 don't have to be reported on your 2010 tax return. Instead, you get to report the income on your 2011 and 2012 tax returns.

Thus, if you converted a $100,000 IRA in 2010, you would report $50,000 in ordinary income in 2011 and $50,000 in 2012, i.e. you get to split your income, thereby potentially reducing your tax burden.

If you do a Roth IRA conversion in 2011 or in a later year, you don't get to spread the income or tax bill over two years. So for one year, your phone will ring off the hook and your mailbox will be stuffed to bursting. Just kidding.


You don't HAVE to split the income however. You and your advisor should engage in "tax planning". If you think splitting the income will create a larger overall tax bill, you can opt out of splitting the income over two years. But the election is all-or-nothing. No piecemeal splits.


Enquiring minds might want to know, given present market dynamics, what happens if you convert to a Roth IRA when there is basis (the original amount invested) in the traditional IRA but it's worth less now than the original contribution(s)? Alas, there's no guidance on that issue. Perhaps a loss can be recognized or perhaps the basis will fully carry over. No one knows yet.

More in our next article. Stay tuned!