An Opportunity to Consider?
Since the Roth IRA was created, many investors have recognized the benefits of tax-free investment growth and tax-free withdrawals. Unfortunately, income limits set for contributions and conversions have prevented many from enjoying these benefits — until now. Beginning 2010, you may be eligible to convert a traditional IRA to a Roth IRA regardless of income*. Individuals with modified adjusted gross incomes that exceed $100,000 will, for the first time ever, have a unique opportunity to convert an existing traditional IRA to a Roth IRA. Individuals are subject to taxation for the fair market value of the amount converted; however, only in 2010 can you receive two tax payment options to select from:
1. Pay all the tax at your current income tax rate in 2010.
2. Include half of the fair market value of the amount converted each year in 2011 and 2012, and pay tax at your applicable tax rate each year.
Two important caveats:
- 2010 is currently stated to be the last year for the current tax rates. Current law provides for an increase in tax rates in 2011; therefore, if you were to choose to spread your tax bill over the two year period in 2011 and 2012, you may be subject to higher tax rates.
- Secondly, the fair market value of the amount converted should be added to your current taxable income. If your income and the amount converted exceed the upper limit of your current tax bracket you will generally be subject to the increased tax rate.
| |
TRADITIONAL IRA |
ROTH IRA |
Contributions
|
Tax-deductible, subject to income limitations
|
Not tax-deductible |
| Earnings |
Tax-deferred earnings |
Tax-free earnings |
| Annual Contribution Limits |
$5,000
($6,000 if you're 50 or older)
|
$5,000
($6,000 if you're 50 or older) |
| Contribution Eligibility |
Anyone with earned income may contribute up to age 70½ |
- If you are single, you may have a modified adjusted gross income (AGI) of up to $105,000 in 2009 to make a full contribution.
- If you are married, filing jointly, you may have a modified adjusted gross income (AGI) of up to $166,000 in 2009 to make a full contribution. |
| Taxation of Withdrawals |
Subject to federal income tax on earnings and deductible contributions. |
- Distributions of contributions are federally tax free.
- Distributions of earnings are federally tax-free if you've had your Roth IRA for at least five years and you've reached age 59½.
(Exceptions exist if the distribution is due to your death/disability, or for a first-time home purchase, or post secondary education expenses.) |
| Required Minimum Distribution |
After age 70½
(Note: RMDs are not required in 2009.) |
None |
Source: Publication 590, irs.gov
Questions to consider:
1. Can I convert previous employer 401(k) balances and other retirement plans under the 2010 tax options?
Yes, these vehicles will be treated with the same benefit as a traditional IRA. If you have a 401(k) plan with a former employer, you may roll it over to a traditional IRA and later convert a portion or all of that account to a Roth IRA. Or, your retirement plan may allow you to rollover directly to a Roth IRA.
2. Has the income limit for Roth IRA contributions also been removed?
No, individuals and married persons with modified adjusted gross incomes greater than $120,000 and $176,000, respectively, are ineligible to make contributions to a Roth IRA. However, if you are not eligible to contribute to a Roth IRA, consider making a non-deductible contribution to a traditional IRA now to maximize the Roth IRA conversion option.
3. I converted my traditional IRA to a Roth and now it has decreased in value. I had to pay taxes on more money than the Roth IRA is now worth. What can I do?
The IRS allows you to recharacterize the amount you converted back to a traditional IRA, in essence undoing your Roth conversion. The recharacterization must be completed by October 15th of the year after you converted the account. (i.e. If you convert your Traditional IRA in November 2010, the recharacterization must be completed by October 15, 2011.) You can then be able to file an amended tax return to get a refund of the taxes you paid on the conversion.
4. How do I convert a traditional IRA to a Roth IRA at Heartland Funds?
If you have a Heartland traditional IRA, but not a Heartland Roth IRA:
If you have an existing Roth IRA at Heartland:
If you have a traditional IRA at another financial institution that you'd like to convert to a new Roth IRA at Heartland:
- Complete an IRA Application (In section 2 select "traditional IRA") and an IRA Transfer/Rollover Form.
- Once the assets are transferred to a Heartland traditional IRA, convert a portion or all of the account to a Roth IRA. Complete an IRA Application (In section 2 select "Roth IRA") and an IRA Distribution Form. (In section 2 select "Convert my traditional IRA to a Roth IRA.")
- Download the IRA Application, IRA Transfer/Rollover, and IRA Distribution Forms here.
* State and local tax laws may treat Roth IRAs differently. Please consult your tax expert regarding the 2010 Roth IRA conversion and to discuss the application of any of the planning strategies to determine their relevance to your facts.