New Year Means New Opportunities For Roth Ira Conversion

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If you already have a Roth IRA, you’re aware of its biggest benefit: Your earnings grow tax free, provided you meet certain conditions. If you don’t have a Roth IRA, you may want to consider one — and it may be easier for you to do just that in 2010.

Before we get to the reasons why 2010 may be your year to open or convert to a Roth IRA, let’s look at some differences between Roth and traditional IRAs.

If you own a traditional IRA, your contributions may be tax-deductible, depending on your income level.

But whether you can make deductible contributions or not, your earnings grow on a tax-deferred basis, which means your money can grow faster than it would if it were placed in an investment on which you paid taxes every year.

On the other hand, Roth IRA contributions are never tax-deductible, but your earnings grow tax free, as long as you’ve held your account at least five years and you don’t start taking withdrawals until you’re at least age 59 1/2.

Furthermore, unlike a traditional IRA, a Roth IRA does not require you to start taking distributions when you reach 70 1/2. Consequently, you’ll have more flexibility and freedom when it comes to making withdrawals.

If you have a traditional IRA, you might be thinking it’s a good idea to convert to a Roth IRA because tax free sounds better than tax deferred — and, all things being equal, tax free would indeed be better.

However, it’s not quite that simple. If you convert your traditional IRA to a Roth IRA, you’ll have to pay taxes on those traditional IRA earnings and contributions that had previously gone untaxed.

If you do convert, you’ll be better off if you use money held outside your IRA to pay the taxes. If you simply take money from your IRA, you’ll obviously lower the value of your IRA — and, if you’re under 59 1/2, you may have to pay an additional 10 percent penalty on the amount you withdraw to pay the taxes.

In the past, many investors have been prohibited from converting their IRAs due to either their tax filing status or their income. Under previous rules, you could convert your traditional IRA to a Roth IRA only if you were married and filed a joint return or were a single filer, and your modified adjusted gross income (MAGI) was $100,000 or less.

But starting in 2010, you can convert funds to a Roth IRA even if your MAGI is over $100,000. You will also be able to convert to a Roth if you are married and file separate tax returns.

And that’s not the only piece of good news regarding your conversion ability. As mentioned above, you will have to pay taxes when you convert to a Roth IRA. However, if you convert in 2010, you can choose to report the taxable income from the conversion over a two-year period, in 2011 and 2012. You may find that spreading the taxes over two years can make the conversion more affordable.

In any case, consult with your tax adviser before converting from a traditional IRA to a Roth. If done correctly, such a conversion can potentially make a big difference in your ultimate retirement lifestyle.

Scott Flake is a financial adviser with Edward Jones. He hosts a biweekly informal investment discussion on the second and fourth Tuesday of each month at 10 a.m. at the Good Samaritan Society Majestic Rim, 310 E. Tyler Parkway. For more information, call his office at (928) 468-1470.

Two local financial advisers receive service award

Ross Hage and Darlene Pierman of Edward Jones recently received the firm’s Client Service Excellence award.

“We are honored to receive this award,” Hage said. “The Client Service Excellence award is special because it is a direct reflection of the relationships we have with our clients.”

James D. Weddle, Edward Jones’ managing partner said, “Ross and Darlene are outstanding members of the Edward Jones team. While all of our associates understand the value of client service, it’s obvious that they have been striving to provide the best service for their clients.”

Contact Hage or Pierman at their Payson office, 113 W. Main Street.

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