New Rules for 2010 Roth Conversions May Help You Save on Taxes

Many investors are familiar with the traditional IRA – an individual retirement account or annuity that provides a tax-deferred way to save for retirement. But many people are not aware of the Roth IRA alternative, an option that offers the potential for tax-free savings. Many are also not aware of the ability to convert a traditional IRA to a Roth IRA, to take advantage of the Roth IRA’s unique benefits. In the past, there were income limits that kept many traditional IRA owners from converting to a Roth. But beginning in 2010, the rules change.

No Income Limits for Roth Conversions Starting in 2010
Before 2010, conversions from a traditional IRA to a Roth IRA were available only for those making $100,000 or less in modified adjusted gross income (MAGI). Beginning in 2010, though, the income limit goes away and everyone is eligible. Not only that, for conversions done in 2010, the taxes due when switching to a Roth IRA can be deferred and spread across two years – 2011 and 2012. For those considering a Roth conversion, that could provide real advantages

Consider the Differences
Keep in mind there are distinct differences between a traditional and a Roth IRA:

TRADITIONAL IRA
ROTH IRA
  • Earnings grow tax deferred until you withdraw, at which time deductible contributions and earnings are taxed at your regular income tax rate
  • Distributions before age 59½ may be subject to a 10% federal tax penalty
  • You are required to begin distributions once you turn age 70½
  • Earnings are free from income tax when you withdraw if you’ve reached age 59½ and have had the Roth for at least 5 years
  • Qualified distributions are tax free
  • There are no required distributions beginning at age 70½

Making the Shift with a Roth Conversion
Deciding whether it pays to shift from a traditional to a Roth IRA can be complex, and just because you can convert starting in 2010 doesn’t mean you should. You need to weigh the possibility of future tax savings from a Roth conversion against the tax bill that will come due now. If you believe your tax bracket may be higher in the future, a Roth conversion might be the right move. But there are many issues to consider, including the product to select for your converted Roth IRA. Annuities are just one choice and can offer safety of principal, guaranteed growth at a declared rate and guaranteed income for life.

For more information about the new rules for Roth conversions in 2010 and the potential use of annuities when converting to a Roth IRA, contact Gary Williams, our Members Financial Services Representative at 1.888.746.0002.

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All guarantees are based on the claims-paying ability of the issuer. If you are considering purchasing an annuity as an IRA or other tax-qualified plan, you should consider benefits other than tax deferral since those plans already provide tax-deferred status. Withdrawals may be subject to surrender charges during the early years of the contract. Withdrawals before age 59½ may be subject to a 10% federal tax penalty.

Representatives are registered, securities are sold, and investment advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC, a registered broker/dealer and investment advisor, 2000 Heritage Way, Waverly, Iowa 50677, toll-free (866) 512-6109. Nondeposit investment and insurance products are not federally insured, involve investment risk, may lose value and are not obligations of or guaranteed by the financial institution. CBSI is under contract with the financial institution, through the financial services program, to make securities available to members.

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