Roth IRA Rules

Roth Conversion Rules for 2010- Pros and Cons

Most people were not allowed to convert from an IRA to a Roth IRA because they made more than the $100,000 income limit. That limit will disappear on January 1, 2010. You can now convert an IRA and employment sponsored plans to a Roth IRA.

Should you do this? Let’s consider the pros and cons:

Pro- A Roth Conversion will allow you to take money out tax free in the future.
Con- You have to pay tax on the money that is moved into a Roth IRA.

Pro- If you have just bought an investment that has appreciation potential now would be a good time to convert it to a Roth so you don’t have to pay tax on any increase in the value.
Con- If you are holding an investment with a large gain, you will have to pay ordinary income tax on that gain in order to convert it to a Roth IRA.

Pro-If you don’t have enough money to pay the tax on the conversion, you can convert a little bit at a time to make it affordable and not get you into a higher tax bracket.
Con- If you happen to be in a high tax bracket during a year you planned to convert, it could cost you more than trying to convert all in a low tax bracket year.