2010 Presents a Potential Planning Opportunity Through Roth IRA Conversions

A Roth IRA can provide numerous planning benefits. In general, assets contained in a Roth IRA and distributions from a Roth IRA are not subject to income tax. Also, there are no required minimum distributions when an individual reaches age 70-1/2, as is the case with other retirement accounts, such as traditional IRAs. These two features of a Roth IRA allow an individual to create a pool of assets that will never be subject to income tax, and that could potentially continue for decades depending upon the designated beneficiaries named under the Roth IRA.

The downside is that when the traditional IRA is converted to an Roth IRA, taxes are currently due on the taxable portion of the traditional IRA. A traditional IRA may consist of deductible and/or nondeductible contributions, depending upon whether the contributor (or his or her spouse) was an active participant in an employer-sponsored retirement plan, and depending upon his or her adjusted gross income. To the extent a traditional IRA was funded with nondeductible contributions, there would be no taxation upon the conversion into a Roth IRA. To the extent a traditional IRA was funded with deductible contributions (and to the extent of the growth on all contributions), there would be taxation upon the conversion into a Roth IRA.

So, the conversion to a Roth IRA may not be of interest to those people, who would prefer not to fund their retirement and/or have to pay tax currently. Those people would prefer instead to defer their tax on IRA distributions.