There have been speculations on whether to convert your qualified retirement plan or IRA to a Roth IRA due to the elimination of income limits in 2010. Depending on your future financial situation, this may be a good or bad idea.

What is a Roth IRA?

An IRA can be invested in a variety of different products, such as products offered by banks, mutual funds, brokerage companies, life insurance companies, or other financial institutions. The IRA is a trust or custodial account set up for the exclusive benefit of the participant and the beneficiary.

A Roth IRA is subject to the same rules as a traditional IRA except for the following.

• Contributions are nondeductible. Thus, active participation in an employer plan is irrelevant.
• If certain requirements are satisfied, distributions are tax free.
• Contributions can be made after the participant reaches age of 70.5.
• Distributions are not required until death of participant.
• Contribution phase out for 2009 when modified AGI is $166,000 to $176,000 for married filing jointly, $105,000 to $120,000 for ingle and HOH, and $0 to $10,000 for married filing separately where both spouses live together.
• Neither a SEP-IRA nor a SIMPLE IRA can be set up as a ROTH IRA.

Roth Conversions in 2010

For Roth IRA conversions in 2010, any amount required to be included in gross income due to the conversion can be included ratably over tax years 2011 and 2012, unless the taxpayer elects to pay the tax on the conversion in 2010. The amount of tax reported over this 2-year period will be accelerated if there is a distribution of any converted amounts prior to 2012.

Tax payers who expect tax increases in the next few years may want to pay the tax currently rather than defer it to a year in which it will be subject to a higher tax rate. Especially since future earnings can be tax free.

Accomplishing a Roth Conversion

An eligible rollover amount may be converted to a Roth IRA by any of the following methods:

1. An eligible rollover distribution from a traditional IRA can be contributed to a Roth IRA within the 60 day regular rollover period.
2. An eligible rollover amount can be transferred in a trustee-to-trustee transfer from the distributing trustee to the Roth IRA trustee.
3. The amount in a traditional IRA can be converted to a Roth IRA maintained by the same trustee by redesignating the traditional IRA account as a Roth account. No new account is necessary in this form of the conversion.

Elimination of Income Limits in 2010

For tax years beginning after 2009, the $100,000 modified AGI limit on converting IRAs and qualified retirement plans to Roth IRA status is eliminated. Also, the requirement that a married taxpayer filing separately does not qualify for a Roth IRA conversion is eliminated.

Should You Convert to a Roth IRA?

Taxpayers will generally benefit from converting IRA funds to Roth status if all of the following conditions are met;

1. The taxpayer or beneficiary will not need to take withdrawals from the IRA for at least 15 to 20 years.
2. The taxpayer’s or beneficiary’s income tax rates when withdrawals are taken are comparable or not significantly less than at the time the conversion occurs.
3. The taxpayer can pay the tax at conversion with funds outside of the Roth IRA.

Since there is no age restriction for contributions and no minimum distribution requirements, investing in a Roth IRA may be a good idea for a taxpayer expecting to work past planned retirement age. A Roth IRA can allow a worker extending their career to continue to build tax-favored retirement savings while still earning more Social Security benefits.