• Consider Converting Your IRA or Qualified Retirement Plan Into a Roth Account in 2010
  • December 15, 2010 | Author: Kirk A. Pinkerton
  • Law Firm: Hinshaw & Culbertson LLP - Schererville Office
  • Roth individual retirement accounts or Roth accounts in a qualified retirement plan (Roth Accounts) offer several tax advantages. For example, distributions from Roth Accounts are not subject to income tax, and no minimum distributions are required to be made from a Roth Account during the owner’s lifetime. Taxpayers should consider converting their individual retirement accounts (IRAs) or qualified retirement plans into a Roth Account in 2010.

    Prior to 2010, many IRAs and qualified retirement plans could not be converted into Roth Accounts if the taxpayer’s modified gross income exceeded $100,000. In 2010, however, they may be, regardless of the individual’s modified gross income.

    In addition, prior to the September 27, 2010, enactment of the Small Business Jobs and Credit Act of 2010 (SBJCA) — which was designed to allow taxpayers to convert funds held in a qualified retirement plan to a Roth Account — a distribution from the qualified retirement plan to a Roth IRA was required. Now that conversion may be made within the qualified retirement plan. In order to allow for such conversion within a qualified retirement plan, the plan must contain a Roth feature and be amended to allow for such conversion, and the funds held in the plan must qualify for a distribution (for example as an in-service withdrawals, or due to attaining age 59 and one half or termination of employment).

    The amount converted from an IRA or qualified retirement plan into a Roth Account will be subject to ordinary income tax. Normally, the amount converted into the Roth Account is subject to income taxation in the year of the conversion. However, in 2010, taxpayers may elect to have the sum taxed 0 percent in 2010, 50 percent in 2011 and 50 percent in 2012. Generally, converting to a Roth Account will not benefit a taxpayer unless the income taxes due can be paid from sources other than the IRA or taxable qualified retirement plan proceeds.