To Convert or Not to Convert - That is The Question

We have been discussing the importance of 2010 Roth Conversion Planning for some time. Ed Slott will cover NEW 2010 Roth Conversion Planning during our 2-Day IRA Workshop, Instant IRA Success, on November 5 - 6 at the Biltmore Resort and Spa in Phoenix, AZ.

It is important to know the basic reasons why individuals should consider or NOT consider Roth conversions.

Reasons to Consider Conversions:

• If your client's income tax bracket may be the same or higher in retirement.
• If your client has the ability to report lower income in any given year, converting in that year could lower his or her income tax on the conversion.
• If your client does not need the IRA funds to live on and can take advantage of the suspension of the minimum distribution rules for 2009.
• If your client has the ability to make contributions even after age 70 1/2 (if there is eligible earned compensation).
• If your client's beneficiaries receive an income-tax-free inheritance.

Reasons NOT to Consider Conversions:

• If your client will have an immediate need for the money.
• If your client expects to have a lower tax bracket in retirement.
• If your client has an aversion to paying the income tax up front and does not trust the government to keep the tax-free deal.
• If your client does not have the liquidity to pay the tax on the conversion from non-retirement assets.
• If your client has named a charity, which is exempt from income tax, as the beneficiary of the IRA. No income tax will be due at the death of the client.

NEW IRS RULING ALLOWS RELIEF ON
UNWANTED 2009 RMDS

RMDs were waived for 2009, but the relief came late in 2008 causing some people to take withdrawals that were not required. IRS Notice 2009-82 provides retroactive relief for IRA owners and spouse beneficiaries by allowing them to rollover (put back) 2009 RMDs received earlier this year.

IRS is waiving the 60-day rollover deadline to permit any IRA owner, plan participant, or their spouse beneficiary to undo the 2009 RMD, regardless of when in 2009 they took the unwanted RMD.

The deadline has been extended to November 30, 2009 or 60 days from the date the funds were received, whichever is later. This means your client who received an RMD (which was not required) in January or March, for example, now has the option of rolling those funds back into a tax-deferred account.

This relief does NOT apply to non-spouse beneficaries who are prohibited by the tax code from ever doing a rollover.

Explanations of the rules that govern IRAs are usually provided in Ed Slott's IRA Advisor Newsletter.