Now that 2010 has arrived, people whose incomes were previously too high to permit them to roll over a traditional IRA to a Roth IRA are calling their investment houses about making conversions. That’s because for the first time, even if your annual income exceeds $100,000, you can convert a traditional IRA — or a SEP IRA, Simple IRA or 401(k) or 403(b) plan held with a former employer — to a Roth IRA.
What’s all the excitement about? To review, a Roth and a traditional IRA are effectively the opposite of one another. You get a tax deduction by contributing to a traditional IRA, but the money you take out is taxed at ordinary income tax rates. While there is no immediate tax benefit for contributing to a Roth, you don’t have to pay tax on the money when you withdraw the funds in retirement. Also, while the original owner of a traditional IRA is required to start distributions after age 701/2, the original owner of a Roth IRA account is not required to take minimum distributions. One major downside to converting from a traditional IRA to a Roth is that you have to pay income tax on the amount you convert.