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What are the new rules for rolling over money from a traditional IRA to a Roth in 2010?

A new rule that takes effect in 2010 will enable more people to have tax free retirement income from a Roth IRA. In the past, you could only roll over money from a traditional IRA to a Roth if your modified adjusted gross income for the year was no more than $100,000 (whether married or single). That $100,000 income limit disappears in 2010, enabling anyone with a traditional IRA to pay taxes and convert the account to a Roth, where it can grow tax-free for the future.

The conversion works best if you can pay the tax bill with money held outside of the IRA or other tax-advantaged retirement accounts, so you don’t deplete the amount in your retirement savings. Also, if you are under age 59½, using IRA money would subject you to a 10 percent penalty on the amount used to pay the tax. If you’ve only made tax-deductible contributions to your IRAs, then you’ll be subject to taxes on the entire amount that you convert to a Roth. If you’ve made both tax-deductible and nondeductible contributions to your traditional IRAs, however, then the tax-free amount of the conversion will be based on the ratio of nondeductible contributions to the total balance in all of your traditional IRAs. If your total balance is $100,000, for example, of which $20,000 represents nondeductible contributions, then 20 percent of any conversion would be tax-free.

There’s a special incentive for converting the account in 2010: You can spread your tax bill over two years, reporting half of the conversion on your 2011 tax return (which you file in April 2012) and the balance on your 2012 return, which can give you more time to save for the tax bill. That special rule only applies to 2010 conversions. After the money is in the Roth, you’ll generally be able to take tax-free withdrawals in retirement (after age 59½), you’ll never have to take required minimum distributions, and your heirs will likely inherit the balance in a Roth income-tax free.

ICMA-RC’s Investor Services team is a group of FINRA-licensed professionals who are available to assist you. If you have questions about your retirement account or for Quarterly News, please call Investor Services at 800-669-7400 or email investorservices@icmarc.org .