Tax Prevention and Reconciliation Act (TIPRA) allows unrestricted tax brackets and age groups for conversion from traditional IRA to Roth IRA

Job Market has a Bumpy Road Ahead

The road to job recovery is still a bumpy ride. In June 2009, the job market was at a 15-month low and U.S. employers were still announcing job cuts. This is the perfect time to start planning for the years ahead. These newly trained advisors can find strategies that will address today's market conditions. TIPRA is a great reason to re-engage with clients who earn a high income. This will challenge the traditional rules of retirement and many people will soon be taking advantage of the ability to convert to a Roth IRA.

Frequently Asked Questions on Roth IRA & retirement planning

1. When do you report the income? Roth IRA 2010, Roth IRA 2011, Roth IRA 2012

Before 2010, the entire amount that was converted would be reported on that year's tax return. Under TIPRA, any conversion that is done in 2010 does not have to be reported on the 2010 return. You will be able to report that income on your 2011 and 2012 returns. For example, if you converted $100,000 in 2010, you would report $50,000 in income in 2011 and $50,000 in 2012. However, if the conversion is done after 2011, you will not be able to spread the tax bill over two years.

2. When do you pay the taxes for the Roth IRA 2010 conversion?

If you choose to split the income after the conversion, you will have to pay all due taxes on your 2011 and 2012 tax returns.

3. Do you have to split the income?

While this is a great benefit for some people, you are not required to split the income. If you believe that splitting the income may create a larger tax bill, you can opt out of the two year option of splitting.

4. Two-Year Split Roth IRA income: If you elect out of the two-year split, is it all-or-nothing, or can you do it piecemeal?

Unfortunately, it is an all-or-nothing option, but if your account is worth less after year 1 you can convert it back into a Traditional IRA penalty free.

5. What would happen if you convert to a Roth when there is basis in the traditional IRA but it is worth less?

There is no official answer to this question. If the traditional account is worth less than the basis, there will be no income earned on the conversion. However, if the taxpayer takes a miscellaneous itemized deduction for that loss in value, the basis of the Roth IRA would then be the value at that time of conversion. Another situation is that there could be no loss recognized on the conversion, but the basis in the traditional IRA account would carry over to be the basis of the Roth after the conversion.

6. What about the five-year Roth IRA conversion rule?

When you do a Roth IRA conversion, there is a different five-year period that applies to the conversion basis amount. Typically, without a conversion, you would be able to withdraw your earnings tax-free as soon as the account is five years old and you are 59 1/2. If you are under this age at the time of conversion, the amount converted will be subject to income taxes, but there will be no 10% early withdrawal penalty. However, conversion basis that was removed from a Roth within five years of conversion will be subject to a recuperative 10% penalty if you are still under 59 1/2. So it likely will make sense to have a separate account for this conversion to avoid confusion. You can always consolidate them together at a later time penalty free.