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Key Planning Opportunities for 2010

tax planning

As with the start of every New Year, some key financial planning opportunities will be available to all investors beginning in 2010.  One opportunity that has not received nearly as much press as others is the upcoming changes in the Roth IRA rules. 


Roth IRA Background

Roth IRAs were created with the Tax Payer Relief Act of 1997.  The attractiveness of a Roth IRA is very apparent.  Not only do funds placed in a Roth IRA, whether through annual contributions or conversions from traditional IRAs, appreciate tax-free, all distributions from a Roth IRA are tax-free as well.  Additionally, unlike traditional IRAs where you are required to withdraw a certain amount each year starting at age 70 ½, there are no required minimum distributions (RMDs) with Roth IRAs.

For the most part, though, the benefits mentioned above were only available to those families who’s modified adjusted gross income (AGI) was less than $100,000 each tax year.  This restriction kept the Roth benefits out of reach for higher income earners – the ones who would gain the most from the benefits. 

However, a provision in the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) removes the income limitation on Roth IRA conversion eligibility beginning in 2010 – and this is a key planning opportunity for everyone.

New Roth Conversion Rules
Beginning January 1, 2010, anyone can convert a traditional IRA to a Roth IRA, regardless of income.  This new tax window opens the door to a tremendous tax-planning opportunity for millions of people, who hold more than $1 trillion in traditional IRAs. 

It is important to understand that the conversion process is a taxable event.  The amount you decide to convert is deemed earned income, and you will owe taxes on that amount at ordinary income tax rates.  However, the provision within TIPRA states that taxes recognized due to conversions made in 2010, and 2010 only, can be spread over two years.  Therefore, half of the taxes due can be paid in 2011 and the other half paid in 2012. 

Ironically, the market downturn over the past 18 months actually benefits those who are looking to convert into Roth IRAs.  Undoubtedly, one’s traditional IRA balance today is considerably less than it was when the market began its decline in September of 2007.  As a result, you are converting a lesser balance thus generating lesser taxes – taxes that can be spread over two years.  Given the long-term historical returns of the market, your new Roth IRA will eventually recoup, and surpass, your traditional IRA balance from 2007 and you will not have to worry about another income tax issue as long as you have your Roth.

So, if you have ever considered converting your retirement accounts to Roth IRAs, 2010 is the year you definitely want to consider doing so.  Please contact MTR Financial Services, LLC if you have any questions or would like assistance in determining if converting to a Roth IRA makes sense for your particular situation.

Matthew T. Russell, CFP®
President, MTR Financial Services, LLC

Matthew T. Russell, CFP®

The Kingwood Connection
is a publication of:

Legacy Marketing Services
P.O. Box 5985
Kingwood, TX 77325

(281) 305-9157


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