Benefits of 2010 Roth IRA Conversion & Advantages of Roth IRA Conversions

2019/10/20

Investors belonging to high income group and saving for retirement are offered a lucrative opportunity. The TIPRA (Tax Increase Prevention and Reconciliation Act 2005) has a provision that allows converting their conventional IRA accounts into Roth IRA accounts.

Individual taxpayers having adjusted gross income over $100,000 or married persons filing separate tax returns were not permitted to do such conversion previously. TIPRA provides these groups the opportunity to convert their traditional IRA and reap benefits like tax free withdrawals that comes with Roth IRA.

Roth IRA conversions are taxable but not subjected to 10% penalty associated with early withdrawal. When you are opting for a Roth IRA conversion in 2010 you can either recognize the conversion income in 2010 or average it over 2011 and 2012 for tax purpose.

There are several advantages of 2010 Roth IRA conversion. Favorable tax treatment from the perspective of distribution is the prime benefit. Such qualified distributions are tax free. Although the conversion from IRA to Roth IRA is taxable it provides you the opportunity to shrink your taxable estate and select Roth funds that are tax free to your heirs. With the conversion in effect, there is no compulsion of RMD (Required Minimum Distribution) during your lifetime.

Most alluring part of this conversion is the tax free investment earnings.
However, there are some IRA rules or conditions that need to be followed for receiving tax free distributions. First condition is that the withdrawal should be at least five years after initial Roth contribution. The other one is in when the owner is more than 59 and half years old, permanently disabled or dead. Tax free withdrawal may be allowed for first time home purchase with a lifetime cap of $10,000, provided the first condition is fulfilled.

Note that gains from 2010 Roth IRA conversion is taxable. While income restrictions are lifted from Roth IRA conversion in 2010 it is not done in case of Roth IRA contributions. Check out details of contribution eligibility depending on your MAGI (Modified Adjusted Gross Income). If you have a 401k, 457 or 403b plan then you need to roll them to a conventional IRA before converting to Roth IRA.

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