Advantages for Converting to a Roth IRA in 2010

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  While the Roth Individual Retirement Account, or IRA, has been around since 1998 , investing in one has always been limited to how much income you have. That changed on Jan 1, 2010, when new federal rules allowed anyone to convert a traditional IRA into a Roth, regardless of their income. Before then, taxpayers who made more than $100,000 annually could not invest in a Roth, but now it is open to all income levels. If you decide to convert a traditional IRA to Roth IRA, you will have to pay taxes on those conversions, but doing so in 2010 has certain advantages.

Earnings are Tax Free

• As long as you are over the age of 59 1/2 and have had the Roth IRA for at least five years, you will not have to pay tax on your earnings. If you expect to be in a higher tax bracket when you retire, opening up a Roth can save you on a larger tax bill later in life.

No Forced Withdraws

• In most IRAs, you must begin taking minimum distributions after the age 70 1/2. With a Roth, you can leave the money in the account as long as you want, effectively giving you an emergency fund later in life. It also gives you the option of leaving a portion of your nest egg to your heirs and reducing the size of your taxable estate.

Avoid a 2011 Tax Hit

• If you are in a top tax bracket, converting to a Roth IRA in 2010 will allow you to avoid higher income tax rates scheduled for 2011.

Spread the Tax Out

• If you decide to convert your traditional IRAs into a Roth IRA, you can elect to pay tax on the conversion on your 2010 return, or spread it out over your 2011 and 2012 tax returns at the tax rate of those years. Doing so will allow you to use funds other than those in your IRA to pay the taxes on the conversion.

Undo a Conversion

• If you convert to a Roth IRA, you have an opportunity to change your mind. If you decide that taking money from your traditional IRA and putting it into a Roth IRA will not work for your retirement plans, you have until Oct. 15 of the next year to undo or "recharacterize" your conversion. If you change after that date, you will be forced to pay the full tax on the amount of your IRA that was converted.