Entrust Financial Services News and Articles

2010 Roth Rule Changes: Is a Traditional to Roth Conversion Right for You This Year?

I have been receiving an increasing amount of calls and e-mails from clients interested in learning more about converting their Traditional or SEP IRAs to a Roth IRA, and also about the 2010 Roth rule changes. Everyone seems to be excited about these rule changes and how it may benefit them.

A Traditional IRA is where you put your funds into the IRA on a pre-tax basis, and the income and profit from the assets in the IRA grow tax-deferred. Upon reaching age 59 1/2, funds may be withdrawn without penalty. A Roth IRA is where you put your funds into the IRA on a post-tax basis, and the income and profit from the assets grow tax deferred for life. This means that you do not pay taxes on the earnings accumulated from contributions that have been in the account for 5 years and you have reached 59 1/2, been disabled, deceased, or for a first time home purchase.  

I recently did a webinar with Keystone CPAs who spoke about some of the benefits of doing a Traditional to Roth conversion, as well as some of the tax strategies to keep in mind. The CPAs stated that a few of the benefits of a conversion to a Roth IRA are tax-free compounding growth and qualified distributions, no required minimum distributions, paying the taxes now and growing tax free, and spreading the tax liability over two years. If you do your conversion in 2010 only, you may choose to pay all of the tax liability in April 2011 or you may choose to spread it out over two years. This means you may pay 50% of the liability in April 2011, and the remaining 50% in April 2012.

There are several reasons why it may make sense to do a conversion this year.  Do you anticipate future tax rate increases or do you feel that you will have a lower taxable income this year? Do you own an asset, such as real estate, that currently has a depressed value, but that you feel will grow in value in the years to come?  

Your tax advisor or CPA can help guide you in determining if a conversion of some of the assets in your Traditional or SEP IRA to a Roth IRA makes sense for you. If a conversion is something that you would like to pursue, contact us and we can guide you through the paperwork.

By Jennifer Williams, Business Development Manager
JWilliams@theentrustgroup.com