December 9, 2009

A New Tax and Retirement Opportunity in 2010

By Curt Ford
Nash Nash Bean & Ford

We all know the importance of saving for retirement. However, those earning above $100,000 have had one retirement saving opportunity denied them: the Roth IRA. The Roth IRA, which became available to some people over a decade ago, is like a traditional IRA, only on steroids. While traditional IRA contributions are tax-deductible and withdrawals are considered taxable income, Roth IRA contributions are not tax-deductible and withdrawals are not considered taxable income.

There are two methods to get money into a Roth IRA: Contributing money to the Roth IRA or converting a regular IRA to a Roth IRA. The rules are different depending on which method is used. For contributions to a Roth IRA, there are income limitations (In 2009, the limit is $120,000 single and $176,000 married filing jointly.) In other words, if you have income over the limit, you cannot make a contribution to a Roth IRA for the year.

Prior to 2010, conversion from a regular IRA to a Roth IRA could not be done if you had over $100,000 in income. However, beginning in 2010, there is no income limitation for converting from a traditional IRA to a Roth IRA. When you convert a traditional IRA to a Roth IRA, you pay tax on any deferred income in the IRA and it then becomes a Roth IRA. Why should you care? A Roth IRA can be a great tool for retirement savings.

  • While you pay tax on the account when you convert from a traditional IRA to a Roth IRA, you normally never pay any tax on the growth. (You pay tax on the growth only if you withdraw from the Roth IRA before 5 years has passed since the date of conversion.)
  • While a traditional IRA grows tax-deferred, growth is eventually taxed when withdrawn. A Roth IRA grows tax-free. Gains within the Roth IRA will normally never be taxed.
  • Traditional IRAs and other retirement plans require you to take minimum distributions after age 70 1/2, based on your life expectancy. There are no required minimum distributions for a Roth IRA, even after you reach age 70 1/2. After your death, your beneficiaries will have to start taking distributions based on their life expectancies, just as with other retirement plans. However, with a Roth IRA your beneficiaries will withdraw that money income tax-free!
  • Roth IRAs can be particularly attractive for those with a taxable estate. The income tax paid when converting to a Roth IRA is no longer in the taxable estate. Essentially, you have saved any estate tax on that income tax. This allows you to pass on more money to those you care about.
  • There is one more reason to convert your regular IRA to a Roth IRA in 2010: You get to choose when you get taxed!
  • –  You can recognize all the taxable income on your 2010 tax return, or
  • –  You can choose to defer the tax and recognize half the taxable income on your 2011 return and half on your 2012 tax return.
  • The tax code lets you benefit from hindsight by allowing you to change your mind and “recharacterize” or undo the conversion from a regular IRA to a Roth IRA without penalty by October 15th of the following year. So, if you convert in early 2010, you would have more than 1 _ years to see if you would have been better off not converting and possibly change your mind.

A Roth IRA can be a great way to save for retirement. But, remember these assets are not controlled by your Will or Trust. These and other valuable assets in your estate are governed by beneficiary designations. A qualified estate and retirement planning attorney, who focuses their practice in that area, can help tailor an estate plan that coordinates the beneficiary designations and also maximizes the “stretch” or period of distribution.

Nash Nash Bean & Ford are members of the American Academy of Estate Planning Attorneys and the National Academy of Elder Law Attorneys. To receive a copy of our most recent newsletter “Your Estate Matters” or for a free consultation on Estate or Long Term Care Planning, call 309-944-2188, 309-762-9368 or 1-800-644-5345. You may also contact our firm by email at or visit our web site at

The firm devotes its practice primarily in the areas of estate, business and tax planning and related areas of the law, as well as elder law and trust administration and probate. We offer guidance and advice to our clients in every area of estate planning.

This column is designed for general information purposes only, and is not intended, nor should be construed or relied upon, as legal advice. Please consult your attorney if specific legal information is desired.

Nash Nash Bean & Ford are members of the American Academy of Estate Planning Attorneys and the National Association of Elder Law Attorneys.