Fall 2009
New Roth IRA conversion rules take effect in 2010
What’s new with Roth IRA and Roth 401(k) Accounts? Well, a couple of things:
2010 Roth IRA Conversions
An individual wanting to convert a traditional IRA to a Roth IRA has to pay federal income tax on any of the traditional IRA’s pre-tax contributions, as well as on any investment gains. However, up until now, there were also limits on who could make a conversion. Under current (2009) law, individuals with adjusted gross incomes of more than $100,000 (whether single or married) are not eligible to make a conversion. In addition, individuals earning more than $110,000 (or $160,000 for married joint filers) are not eligible to even contribute to a Roth IRA.
Those rules are about to change. Thanks to the Tax Increase Prevention and Reconciliation Act of 2006, beginning in 2010 and for all years beyond, the $100,000 income limit for Roth IRA conversions is removed. This means that anyone can convert their traditional IRA to a Roth IRA; they simply have to pay tax on the pre-tax and investment gain dollars. For conversions made in 2010, there is an added incentive – for 2010 conversions only, income taxes due on the conversion may be spread over two years, lessening the tax impact.
This change does not affect the rule that prevents an individual earning more than $110,000 / $160,000 jointly from contributing to a Roth IRA. However, such an individual can still take advantage of the change in 2010 and beyond by converting an existing traditional IRA to a Roth IRA. Again, they would simply have to pay the taxes due upon conversion.
For more information on this rule change and how it affects individual taxpayers, contact your tax advisor.
Rollovers from Qualified Plans to Roth IRAs
The IRS also recently issued Notice 2009-75, which clarifies the rules that deal with how and under what circumstances amounts can be rolled from qualified plan accounts to a Roth IRA. Three items of note here are:
- If an eligible rollover from a non-Roth plan account is rolled to a Roth IRA, the amount included in gross income is equal to the amount rolled over, reduced by the amount of any after-tax contributions included in the rollover, much as if the distribution had been rolled to a non-Roth IRA and then immediately converted to a Roth IRA.
- Beginning in 2010, the income limits for a rollover from pre-tax qualified plan accounts to a Roth IRA are removed. Currently (2009 and earlier) only qualified plan participants with an adjusted gross income of $100,000 or less are able to make such a rollover.
- Prior restrictions on rollovers from a Roth qualified plan account to a Roth IRA have been removed. Prior to 2010, in order for rollover distributions from Roth plan accounts to Roth IRAs to be excluded from taxable income, the rollover had to (1) be at least 5 years after the first year Roth account plan contributions were made and (2) be made after the participant reached age 59½. Beginning with 2010, these two requirements are no longer imposed.
As always, plan sponsors and participants should consult their tax advisor regarding their particular situations.
