Roth IRA conversions surge in 2010

climbing to retirement savings goals

Roth IRA conversions are rising as taxpayers take advantage of tax breaks and beat the prospect of rising federal taxes in 2011. Image: CC/Picasa Web Albums

Converting to Roth IRAs has significance for retirement savings goals in 2010. The prospect of higher taxes enacted by Congress after the mid-term elections is increasing Roth IRA conversions. Plus, the IRS removed income limits that prohibited richer people from setting up Roth IRAs, and taxpayers have a three-year window to pay taxes due on 2010 Roth IRA conversions.

Why Roth IRA conversions are on the rise

Roth IRA conversions are surging in popularity. The Associated Press reports that people want to lock in current tax rates or take advantage of a substantial one-time tax break that expires December 31. Interest in Roth IRA conversions spiked earlier this year when households with more than $100,000 in income became eligible for 2010. Interest is rising again as people expect Congress to increase federal taxes after the midterm elections. Converting a traditional IRA to a Roth IRA before year’s end locks in 2010 tax rates. To sweeten the deal, the IRS is letting taxpayers spread out payment of taxes due on a Roth conversion over 2011 and 2012.

Roth IRAs versus traditional IRAs

According to, Roth IRA contributions aren’t tax deductible, but the money grows without being taxed. Plus, no taxes are due when the money is used for retirement. Roth IRAs also have no minimum distribution requirement after age 70 like traditional IRAs. Because contributions to a traditional IRA are a tax deduction, taxes on that contribution are due upon conversion to a Roth IRA. However, Dave Sadler, a certified financial planner, told bankrate that  most retirement accounts haven’t recovered from the beating they took in 2007 and 2008, making taxes due on a Roth conversion much less than they would be otherwise.

Catch-up contributions

This time of year, people should re-evaluate and check off their retirement savings goals, says Mark P. Cussen at Investopedia. Cussen writes that for people who may have fallen behind, now is the time to catch up. In addition to the Roth IRA conversion, he offers tips such as “catch-up” contributions. In 2010, people 50 and older can make additional contributions to their qualified plan or IRA of up to $5,500 over the maximum $16,500 allowed. Another $1,000 over the maximum  is allowed for traditional and Roth IRAs in 2010. Best of all, the contributions can be delayed until April 15, 2011 and still qualify.

Other recent posts by bryanh