Income Tax Rules for Roth IRA Conversions
A lot of what you knew about converting a traditional IRA to a Roth IRA will change in 2010. Plus, there's a one-time offer: Convert in 2010 and take three years to pay the tax bill.
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History
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Before 2010, persons with modified adjusted gross incomes (MAGI) of more than $100,000---whether single or filing jointly---were ineligible to convert assets from a traditional IRA to a Roth. And only assets from traditional and Simplified Employee Pension (SEP) IRAs could be converted to a Roth.
Income Limits
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Beginning in 2010, there are no income limits for Roth conversions. Anyone---Bill Gates, even---can do it. (Income limits remain for Roth contributions.)
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Accounts Available
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You can convert assets from an employer's tax-qualified plan---401k, 403b and the like---directly into a Roth. However, rolling over an employer's plan into a traditional IRA first would allow you to make partial Roth conversions and better manage your immediate tax bill.
Taxes
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You will pay taxes at your current marginal rate on the converted value as of the transaction date. But in 2010, you can split the conversion in two and pay the taxes with your 2011 and 2012 tax returns. That last one is not due until April 15, 2013.
Convertible Amounts
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You can convert all or any portion of your IRA, but you can't pick only the non-taxable part. The conversion must be in proportion to the account's taxable and non-taxable assets.
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