Why Should I Consider a 2010 Roth IRA Conversion?
Changes to the Roth IRA conversion rules in 2010 may now allow you to convert your tax-deferred retirement assets to a Roth IRA, creating opportunities for you to generate tax-free retirement income for yourself and potentially for your beneficiaries too.1
What are the benefits of a 2010 Roth IRA Conversion?
- Effective January 1, 2010, the income restriction for conversions is being lifted indefinitely, making you eligible to convert to a Roth IRA regardless of your income level.
- Typically Roth IRA conversions require you to pay income tax on the full amount of any tax-deferred assets that you convert in the year of conversion. However, under a special rule for conversions completed during 2010, unless you choose complete recognition in 2010, you can spread the tax liability equally over (2011 and 2012).2
- Contributions to a Roth IRA have the potential to grow tax free, and you don't have to pay any income tax when you withdraw your savings in retirement.3
How can I tell if a Roth IRA Conversion is right for me?
Converting to a Roth IRA could have many benefits, but may not be ideal for everyone. There are tax implications that you will need to consider, and it is strongly suggested that you speak with your tax advisor4 before making any decisions.
The questions below are designed to help you further explore whether a Roth conversion strategy makes sense for you.
If you answer 'yes' to many of the questions below, you may want to consider a Roth IRA conversion.
- Do you have assets invested in traditional IRAs or employer-sponsored retirement plans?
- Do you have funds outside of your IRA to pay the income taxes that a Roth IRA conversion will trigger?
- Do you want to increase your tax-free savings as part of your overall portfolio strategy?
- Do you anticipate that your tax bracket or tax rate will be higher in retirement?
- Do you want to potentially reduce the taxable value of your estate?
Before making any decisions, you should consult your tax advisor.
What types of accounts are eligible for conversion?
- Traditional IRA
- Rollover IRA
- SEP IRA
- SIMPLE IRA (after held for 2 years)
- Assets in tax-qualified retirement plans 401(k), 403(b), 457(b), profit sharing and money purchase plans
1 Please note, however, that income-based restrictions are still in place regarding how much you can contribute to a Roth IRA
2 This is a legislated change that is only available for 2010. All conversions made after December 31, 2010 will be subject to taxation in the year of conversion.
3 Any earnings are tax-free if you are at least 59 ½ or unless you qualify for an exception defined by the IRS and the Roth IRA has been funded for at least five years from the year of conversion. There is a 10% penalty for withdrawals of earnings taken before age 59 ½
4Merrill Lynch does not provide tax, accounting or legal advice. You should review any planned financial transactions or arrangements that may have tax, accounting or legal implications with your personal professional advisors