A conversion is the process of changing your Traditional IRA into a Roth IRA. This is completed by filling out a conversion form with your custodian. You will pay the taxes on the money being converted at your current income tax rate, based on your adjusted gross income. Once your Traditional IRA has been converted, if you follow the IRS rules, your Roth will grow tax-free.
In my last blog entry, we talked about income limitations to be eligible to contribute to a Roth IRA. The same income limitation rules have always applied to converting your Traditional IRA into a Roth IRA…until now. For the year 2010, Congress has dropped the income limitations making it possible for highly compensated individuals to convert their Traditional IRAs to Roth IRAs. You will also have the option to pay the taxes over the next two years, instead of just one.
It is unclear whether these new rules will remain in place in 2011, but it’s already November and we haven’t heard if the rule will be renewed, so it’s likely that it will not. This means that if you are a highly compensated individual who would like to convert your Traditional IRA into a Roth IRA, you will need to have your conversion completed before December 31, 2010.
Please be sure to contact a CPA or tax professional if you have any questions about possible tax consequences and whether or not a conversion would be right for your situation.