Roth Conversions 2010 – Important considerations

Services for Real Estate Pros with Midland IRA and 1031 Tax Free Strategies

The magic day for Roth IRA Conversion is quickly approaching - January 1, 2010.  This will usher in a whole new era for investing in Roth IRAs.  Currently, if you have adjusted gross income of greater than $100,000, you cannot convert your Roth IRA to a Traditional IRA.  Effective January 1st, the law will allow everyone, no matter what your income is, to convert to a Roth IRA.

The benefit of converting lies in the fact that distributions from a Roth are tax free versus taxable in a Traditional IRA.  From an investment stand point, a better decision would be to convert appreciating assets.

If you are considering making a conversion, there are several factors that must be considered.

1.       Value of the asset being converted – Based on current market condition it might be an excellent time to do a conversion.  When you do a conversion to a Roth, you do have to pay regular tax based on the current value.  If you own a piece of land, this might the time to do the conversion because most values are down.  If you own gold, you might want to hold off because gold prices are at all time high.  As noted above, you will have to pay income tax on the converted amount but you are not subject to IRA early distribution penalties of 10%.

2.       Do you have the money to pay the tax on the conversion?  Typically you do not want to use IRA conversion money to pay the tax.  It is best to use personal funds so that all tax sheltered retirement money can continue to grow tax free.

3.       What will your income be in the year of conversion?  If you know that your income will be down in 2010 that might be a better year to convert versus future years when the income is greater.  When you do a conversion you are still taxed but try to do a conversion when in a lower  tax bracket.

Finally any Roth Conversion in 2010 will let you defer the tax payment for two years.  This is a special onetime tax law change.  The way it works is, if you do a conversion in 2010, you will report no income in 2010, half the conversion amount as income in 2011 and the other half in 2012.  That means the final tax payment could be delayed until April of 2013.

Please consult your tax advisor before doing a Roth Conversion.  Everyone has a unique tax situation so please take the time to learn the learn the law and understand these changes.

Dave Owens, CPA, CES, is the managing member of Entrust Freedom, LLC.  If you have any questions about this article and would like more information please feel free to contact the author.  Dave can be contacted or 239-333-1031.  Dave has been a practicing tax accountant for over 20 years. 

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Dave Owens, CPA, CES®

Managing Member

1520 Royal Palm Sq Blvd #320

Fort Myers, FL 33919


239.333.1031 x203

239.466.5496 Fax


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