2010 IRA Conversion Might be Wise Move

This new year means a new way for some investors to prepare for retirement.

Under the Tax Increase Prevention and Reconciliation Act of 2005, taxpayers with modified adjusted gross incomes of more than $100,000 can convert traditional IRAs to Roth IRAs beginning in 2010. Previously, taxpayers with MAGIs of more than $100,000 were not eligible for conversion.

While traditional IRA account holders are taxed on both their original contributions and their investment earnings when they begin to withdraw money, Roth IRA account holders deal with tax responsibility via nondeductible contributions, but don’t pay taxes – even on earnings – when they withdraw money.

Chris Sohosky, a guided portfolio manager and financial adviser at Morgan Stanley Smith Barney LLC’s Rogers office, said the new ability to convert can be beneficial for multiple reasons.

“I think the biggest advantage is that funds are not taxable when they’re withdrawn,” Sohosky said, “and there’s also no required minimum distribution.”

Sohosky said this might be an appealing option for retirees on Social Security and those who want to pass on their wealth to future generations or charities.

Conversion does include some tax liabilities.

“In general, taxes should be paid with non-IRA funds in order to be beneficial,” Sohosky said, adding he recommends clients also consult their tax advisers.

“Every circumstance is different … but it’s worthwhile investigating,” Sohosky said. “I have seen a lot of clients exploring this option and I expect to see a whole lot more.”

Sohosky isn’t alone. Scott Cain, an adviser with Raymond James in Fayetteville, will be making Roth conversion presentations to small groups throughout the year.

Cain pointed out even those who weren’t previously precluded from converting due to income might want to take advantage of the situation. Anyone converting to a Roth account in 2010, he said, will have the option of paying any accompanying taxes over a two-year period.