A Simple Conversion

Thanks to the Pension Protection Act of 2006, investors can now convert funds in their 401(k) plans and other employer-sponsored retirement plans directly to a Roth IRA. Before the provision went into effect in 2008, investors first had to roll funds to a traditional IRA before converting to a Roth.

With a new streamlined process that allows for fewer possible transfer mistakes, now is a good time to consider whether a Roth IRA conversion would be appropriate for you.

Roth IRAs provide the opportunity to receive tax-free withdrawals in retirement. Also, unlike tax-deferred plans, there are no mandatory distributions from a Roth during your lifetime.

As attractive as a tax-free retirement income sounds, there are several factors to consider when determining whether to convert to a Roth.

Dwindling Deductions

If you expect to be in a higher tax bracket in retirement, or expect tax rates generally to be higher in the future, a Roth conversion could make sense. Your tax situation might look a lot different in retirement. You may have fewer deductions: little or no mortgage interest, no child dependents, and no tax-deductible retirement plan contributions.

Tax Time: Today

When you convert funds to a Roth, you must pay ordinary income tax on the funds converted in the tax year of the transfer.* The amount is included in your gross income when you calculate your taxes. If you use some of the tax-deferred funds to pay the taxes incurred due to the conversion, there is a risk of triggering a 10% federal income tax penalty for early distributions before age 59½.

Unlimited Means

In 2008 and 2009, taxpayers (filing a joint or a single return) with modified adjusted gross incomes of $100,000 or less are eligible for a Roth conversion. In 2010, this income limit will be repealed.

To qualify for the tax-free and penalty-free withdrawal of earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59½ or as a result of death, disability, or a first-time home purchase (up to a $10,000 lifetime maximum).

It has never been easier to convert all or part of your employer-sponsored plan assets to a Roth IRA. Call today to determine whether you would benefit from a Roth IRA conversion.

*For conversions completed in 2010, the income taxes can be deferred until 2011 and 2012, with 50% of the tax bill due each year.