This year marks several changes when converting from a traditional individual retirement account to a Roth IRA.
According to CUNA Mutual Group's MEMBERS Financial Services, before 2010, conversions were available only for those making $100,000 or less in modified adjusted gross income. Beginning this year, the income limit goes away and everyone is eligible. When conversions from a traditional IRA to a Roth IRA are done in 2010, the taxes due can be deferred and spread across 2011 and 2012.
Under traditional IRAs, earnings grow tax deferred until they are withdrawn. Deductible contributions and earnings are then taxed at the account holder's regular income tax rate. Distribution must start at the age of 70 1/2. If distributions are made before age 59 1/2, they may be subject to a 10% federal tax penalty. Roth IRA earnings are free from income taxes if the account holder is 59 1/2 and the account has been in place for at least five years. Distributions are not required at age 70 1/2 and qualified distributions are tax free.
MEMBERS Financial said while the Roth IRA conversion rules have changed, members should consider the advantages and disadvantages of future tax savings versus paying a tax bill now.