INSIGHTS & IDEAS

Now may be the time to convert traditional IRAs into ROTH IRAs

If your modified adjusted gross income for 2009 is less than $100,000 you may be able to take advantage of the low stock market by converting your traditional IRA into a ROTH IRA.  By doing so, any future appreciation in a ROTH IRA will not be taxed.  Of course, by making the conversion now the balance converted will be taxed in 2009. 

If in the event the stock market does not appreciate by the time you file your 2009 tax return, it is possible to recharacterize the conversion back to the traditional IRA and avoid paying tax on the prior conversion.  By extending your 2009 tax return you can defer this decision until October 15, 2010.

In 2010 there is no restriction on adjusted gross income, so everyone can do a rollover, starting in January 2010.  As an added plus you can defer the tax liability and pay half in 2011 and half in 2012.  If the market doesn’t appreciate by April 15, 2011 – October 15, 2011 with extension (God help us!) you can recharacterize the conversion back to the traditional IRA and avoid the tax otherwise assessed on the conversion.

It should be noted that unless you are older than 59½ a 10% penalty will be assessed if you withdraw the funds from the converted ROTH IRA to pay the tax.