Converting Your Traditional IRA into a Roth

by Stacy Francis, CFP®, CDFA

With tax season just around the corner, IRAs seem to be on everyone’s mind. Several clients have called me up over the past couple of days to ask about the Tax Increase Prevention and Reconciliation Act of 2005 – a law that offers high-income individuals a window to convert their traditional IRAs into Roth IRAs in 2010. To help you determine whether you should take advantage of this law or not, here’s a brief summary.

Contributions to traditional IRAs are tax deductible. The money grows tax deferred in the account, and you pay tax when you withdraw the money, as a retiree. With a Roth IRA, on the other hand, contributions are made on an after-tax basis, but you do not have to pay tax when you withdraw the money. As you can imagine, each account type has a number of different advantages and disadvantages, and you first of all need to determine which one is the most appropriate for you. It could be both!

Normally, only individuals with adjusted gross income of less than $100,000 per year are allowed to convert traditional IRAs into Roth IRAs. The Tax Increase Prevention and Reconciliation Act of 2005 temporarily removes this restriction in 2010, so that anyone can convert. By moving money from a traditional IRA to a Roth IRA taxes will be due. The law fortunately enables individuals looking to convert to split the subsequent tax bill paying half in 2011 and the other half in 2012 making the tax bill a little less painful.

If you have been envying people with Roth IRAs, this may be your chance to get one of your own. Your financial advisor can help you determine whether you should convert or not in 2010, depending on your unique, personal circumstances.

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Stacy Francis, CFP®, CDFA

Stacy Francis is the Founder, CEO and President of Francis Financial, Inc., a Wealth Management and Financial Planning firm. With over 18 years of experience in the financial industry, she is a CERTIFIED FINANCIAL PLANNER™ (CFP®), a Certified Divorce Financial Analyst™ (CDFA™), and a Certified Estate Planning Specialist (CES™). She is the Co-Director of the Association of Divorce Financial Planners’ (ADFP) Greater New York Metro Chapter and a member of the Women Presidents’ Organization (WPO) and an honoree member of the Private Risk Management Association (PRMA). A nationally recognized financial expert, Stacy has appeared on ABC News, CNBC, CNN, PBS Nightly Business Report, The Today Show, Good Morning America, Fine Living Network, and The O’Reilly Factor. Stacy attended the New York University Center for Finance, Law and Taxation.