God that is a horrible pun. But it IS a good question. Buried in the recent tax law changes is a useful gem. This year, and for this year only, an individual can convert their IRA to a Roth IRA regardless of income AND can spread the income out over the 2011 and 2012 tax years.

Regular v. Roth Primer

For those unfamiliar, the primary difference between a regular and a Roth IRA is how they’re taxed. A traditional IRA gives you a current deduction for your income taxes. The investment grows tax-deferred until you withdraw your money, at which time the withdrawals are taxed as ordinary income. With a Roth IRA, it is the opposite. You receive no tax deduction currently, the investment grows tax-deferred, and as long as you hold the investment the required time, the withdrawals are tax-free. There are several factors to consider when determining which is better for an individual investor, but generally, the longer you have to invest, the more the decision tilts towards the Roth. One other important difference between the two is the Roth’s lack of required minimum distributions. With a traditional IRA, the IRS requires taxpayers to start taking distributions (and pay tax on it) beginning when you are 70.5. With a Roth, there are no required distributions. You can leave the money invested as long as you want, including until you die and pass to your beneficiary.

Roth or Roll?

In the past, if you have made more than $100,000, you couldn’t convert a traditional IRA to a Roth. This year, that requirement is waived. There is NO limit on income for 2010 to make such a conversion. Additionally, you may defer the taxes over the next two years (2011 and 2012). As an added bonus, you have until April 18th, 2011 to decide whether you want to pay all of it using the lower 2010 rates, or tax it in 2011 and 2012. By then, we should have some idea as to whether Congress will reinstate the tax cuts set to expire at the end of this year.

Also, don’t forget, a taxpayer can roll a retirement plan account directly into a Roth plan instead of a traditional IRA. Of course, you will have to pay the taxes on the distribution.

So why the gift? Generally, Congress see this provision as a revenue raiser. They were betting that many taxpayers would take advantage of the expiring tax cuts, and pay tax on their IRA assets now, or pay with the higher 2011 and 2012 rates. Either way, it’s more money for the Treasury now. This is an interesting option that may appeal to many taxpayers.

We Are Here To Help

Let our professionals help you with any of you bookkeeping, payroll or tax needs. Contact our offices in Oklahoma City: 405-720-1244 or Tulsa: 918-477-7650 to get the help you need.