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10 Tips if you are planning to convert IRA to Roth IRA

Converting a Traditional IRA to a Roth IRA is attractive because:

Income and gains accumulate tax free and are distributed tax free.
Roth IRA is exempt from RMDs (Required Minimum Distributions).
Before 2010, you could only convert if your Modified Adjusted Gross Income (MAGI) was $100,000 or less. Beginning 2010, there is no longer an income restriction on conversion.

Here are 10 things to keep in mind if you are planning to convert a Traditional IRA to a Roth IRA.

1) Be Prepared for a Tax Hit on Conversion

Conversion treats the converted amount as a distribution from the traditional IRA. This usually results in an increase in taxable income and a higher tax bill.

2) Using the Financial Meltdown to your advantage

If the value of your traditional IRA is still beaten down from the financial meltdown, now might be the optimal time to convert. Conversion will be reported on your 2010 return and you can take advantage of today’s favorable rates as your portfolio is still depressed.

3) No More Income Restrictions on Conversions

Beginning 2010, there is no income restriction on converting a traditional IRA to a Roth IRA. Prior to 2010, conversion was only allowed if your Modified Adjusted Gross Income was $100,000 or less.

4) You Can Defer the Conversion Tax Hit

You can choose to spread the taxable income triggered by a 2010 conversion over the following two years for federal income tax purposes. Specifically, you can report half the income on your 2011 return and the other half on your 2012 return. This procedure will defer the conversion tax hit, but that may or may not be a good idea. It all depends on the tax rates you’ll be paying in 2011 and 2012. If you expect significantly higher tax rates in those years, you might be better off following the standard procedure of reporting 100% of the conversion income on your 2010 return. Thankfully, you can postpone the decision until as late as Oct. 17, 2011, by extending your 2010 Form 1040 to that date.

5. Converting Can Jump-Start Your Roth Savings Program

Since there’s no dollar limit on conversions, converting a hefty traditional IRA into a Roth is the quickest way to stuff a bunch of money into a Roth account and start collecting tax-free income and gains. The alternative of making annual contributions only allows you to put $5,000 a year into your Roth IRA, or $6,000 a year if you’re 55 or older.

To be continued…

Mohit Gupta
Gupta Tax & Business Services
Phone: +1 (516) 731-2956 | Fax: +1 (718) 504-4498
www.guptatax.com