Americans habitually are slow to adopt opportunities to save taxes. Maybe this is due to our desire for instant satisfaction, or we don’t want to take the time to study and learn all aspects of an opportunity. Looking at Individual Retirement Account, Health Savings Accounts, and now Roth IRA conversions, we see this pattern again. These tax saving opportunities were slow to be accepted, but have grown steadily and should continue to.

One reason that conversions from Traditional IRAs to Roth have been slow to occur is that there were limitations on those who could make the conversions. Income, whether married or single, could not exceed $100,000. In 2010, this will all change. There will no longer be any income limitation for transferring from a Traditional IRA to a Roth IRA. What’s the big deal? Why would anyone want to make a conversion, pay taxes today and realize benefits in the future?

First, tax rates are going to be going up.  In case you haven’t noticed, our government has been printing money and creating a national debt that will clearly require future tax increases to manage.

There are more reasons to consider a Roth conversion. All assets in the Roth account grow free of taxes. That is the same as a traditional IRA, but wait, there is more. Assets from the Roth IRA can be withdrawn free of any income tax – provided you are over 591/2 and your Roth IRA is more than five years old. There are no minimum distribution requirements once your turn 701/2.

The conversion from Traditional to Roth IRA is considered a taxable event. However, the government is giving you two years to pay any taxes that occur from the transfer. You can also make serial conversion, transferring part of your traditional IRA in steps to stretch out the tax payment.

There are a number of variables that have to be considered before you make a decision about conversion. Age, life expectancy, current financial situation, and several other factors come into play.  This is not a decision that should be made without analysis. Fortunately, there are a number of calculation tools that have been developed for just this purpose. If your situation is such that a conversion would be beneficial, it is best to start the consideration process early. 2010 is not far away, and those who move early will have the benefit of a longer period of asset growth, and higher tax free income later on.

For additional information on Roth conversions and the evaluation of the opportunity, please contact us at anadolna@associatesgroupinc.com