Converting from a traditional IRA to a Roth IRA allows you to pay income tax now, so that the income from future growth of the funds within the Roth IRA will be tax free. This is especially beneficial if the funds in your traditional IRA took a dive due to the recent economic downturn but are expected to recover in the coming years. Another benefit to converting is that traditional IRAs require that you begin receiving distributions at age 70-1/2. Roth IRAs do not have this requirement, so the full amount in the Roth IRA may be passed on to your children and grandchildren.

Under the old rules, if you had a modified adjusted gross income (MAGI) greater than $100,000, regardless if you were single or married filing jointly, you were not eligible for this conversion. The new rules remove the MAGI limitation so anyone can convert their retirement plans to a Roth IRA. In addition, under the previous rules, the entire amount converted from a traditional to a Roth IRA was recognized as income in the year the conversion occurred. The new rules, however, allow taxpayers to recognize 50% of this income in 2011 and the remaining 50% in 2012. These rules are in effect only for conversions completed in 2010.

If you want more information on how these new rules could affect you or for additional tax planning advice, please contact us. Our Director of Tax Services, Sarah Hancock, or Tax Manager, Leisha Gardner would be happy to assist you and can be reached at 972-644-7112.