| 05 January 2010
It has not often been the case over the last decade where the game of investing has been stacked in the individual's favor; but this is a new year, a new decade, and 2010 Roth IRA conversion rules are the exception. As many know the 2010 rules allow everyone, no matter their income, the opportunity to convert Traditional IRA assets to Roth IRA assets; pay the tax now and the assets grow tax-free forever.
The game begins with how the markets perform in 2010; if heads (the market goes up), you have won by converting tax-deferred assets to tax-free assets at a lesser value than your newly tax-free assets are now worth. If tails (the market goes down), Uncle Sam loses out on your paying tax at a greater value than your newly tax-free assets are now worth by your recharacterizing (undoing) the conversion and returning the assets to their original Traditional IRA status.
Heads I win, tails you lose; good game, right? Then let's play the game not once, but four times. Converting Traditional IRA assets into four separate Roth IRAs each holding a distinct asset class like small-cap equities, large-cap equities, international equities and commodities now avails you the option to recharacterize each of the new Roth IRA accounts individually depending on how that asset class performs.
Our game ends when you want it to; the decision to recharacterize a 2010 Roth IRA conversion does not need to be made until October 15, 2011 - with tax extensions - and recharacterized assets may again be re-converted after 30 days. To execute a conversion you will need to pay taxes on the entire amount of dollars converted; typically it will be better for you to use liquid funds on hand for the expense instead of pulling the tax money from the Roth Conversion proceeds. Taxes due on the conversion may be divided between your 2011 and 2012 federal returns, but you must also take into account your expectation for tax rates to potentially increase after 2010.
The game is also open to more investors than most know. If you do not currently have a Traditional IRA due to maximum income limit rules, you may contribute to a Non-deductible IRA that can be converted to a Roth IRA. Or, if your retirement assets are 'trapped' inside an employer 401(k), and if you are over 59.5 years old, some 401(k) plans allow rollovers to outside Traditional IRAs while you are still employed without adverse tax consequences. Roth IRA conversions may also have secondary benefits to investors with estate tax issues or net operating losses from their business ownership. As always, talk with your accountant or financial advisor first to see how the 2010 Roth IRA conversion rules have changed the game to benefit you.