Retirement Planning Guide

On January 1, 2010, nearly $1.4 trillion of retirement assets will immediately become eligible to be converted to a Roth IRA. Thanks to the Tax Increase Prevention and Reconciliation Act of 2005 ("TIPRA"), higher income individuals will be able to take advantage of a conversion opportunity once limited to those taxpayers with an adjusted gross income less than $100,000.

The financial adviser's role in determining whether and how much of an individual's retirement assets should be converted will be critical. Advisers will need to understand the rules of Roth conversions and what circumstances make it beneficial to do the conversion.


The Roth Conversion Rules

• Currently, taxpayers can convert traditional IRAs and qualified retirement accounts, such as 401(k) accounts, to a Roth IRA as long as their adjusted gross income is under $100,000. In 2010, and for all subsequent tax years, the $100,000 limit is eliminated and all taxpayers will be permitted to convert their retirement assets to a Roth IRA.
• The amount converted to a Roth IRA will be included as ordinary income for the year in which the account was converted. However, for conversion in 2010 only, taxpayers can elect to defer half of their tax liability to 2011 and the other half to 2012.
• The Roth IRA can grow and be distributed tax-free as long as distributions are not taken within five years of the first contribution or conversion, and not until after age 59 1/2.

Roth Conversion Considerations

All taxpayers should discuss with their advisers whether and how much of their retirement assets should be converted to a Roth IRA. The factors to consider when converting retirement assets to a Roth include investment timeline; available assets to pay the resulting income taxes; current income tax bracket; anticipated income tax bracket in retirement; and whether income tax rates might be lower or higher in the future. Whether a Roth conversion makes sense will depend on some of these factors and each individual's specific financial and estate planning goals and objectives.

Why convert retirement assets to a Roth?

This is potential reasons:

1. The current market provides a low-cost conversion opportunity
2. Social Security planning
3. Gross up the value of retirement accounts
4. Tax diversification
5. Hedge against increasing income tax rates
6. Tax loss Harvesting
7. Reduce taxable estate
8. Trust planning
9. Tax-free stretch