Taxpayers with modified adjusted gross incomes of $100,000 or more are allowed to convert a traditional individual retirement account (IRA) to a Roth IRA beginning in 2010. In prior years only taxpayers below the $100,000 threshold were allowed to take advantage of this potential tax saving opportunity.
A conversion from a traditional IRA is treated as a taxable distribution in which income taxes must be paid but you are allowed to defer any income tax payments due on 2010 conversions into 2011 and 2012.
Converting to a Roth IRA can provide significant tax benefits depending on your particular situation. The funds that are converted into your Roth account and all future earnings become tax free forever unlike a traditional IRA that is taxed upon distribution.
Taxpayers will generally benefit from converting IRA funds to Roth status if you do not need the funds for 15 to 20 years, your income tax rates when the withdrawals are taken are similar or not significantly less than in the conversion year, and you can pay the tax upon conversion with funds from outside the Roth IRA.
