Starting in 2010, everyone became able to enjoy the tax-free benefits of a Roth IRA, regardless of annual income.

Historically, the Roth IRA has had strict eligibility requirements based on income levels, which limited investor participation in this valuable retirement savings vehicle. With the new Roth conversion provisions, that has all changed.

Last year, the $100,000 modified adjusted gross income ceiling was eliminated for conversions from a traditional IRA (and some employer retirement plans) to a Roth IRA.

Like a traditional IRA, the Roth IRA offers tax-deferred growth — plus, these additional retirement benefits:

No required minimum distributions for account holders, and potentially for spousal beneficiaries.

The ability to contribute past age 70½ for individuals with earned income.

Qualified tax-free distributions.

Remember, there are no income eligibility limits for non-deductible contributions to traditional IRAs. Anyone under age 70½ with earned income can contribute up to $5,000 for 2011. Investors age 50 or older can make an additional annual $1,000 in catch-up contributions.

You will have to pay income tax on the taxable portion of the assets you convert to a Roth IRA. However, for individuals who converted to a Roth IRA in 2010, their tax liability can be stretched over the next two tax years by paying 50 percent in the 2011 tax year and 50 percent in the 2012 tax year. Check with your tax adviser for additional details on whether or not this strategy makes sense for you.


If you convert from a traditional IRA, SEP-IRA, SIMPLE IRA or rollover IRA that contain both pre-tax and after-tax assets, you should be aware of the pro-rata rule. The taxable portion of your conversion will be determined by the ratio of the pre-tax earnings to the after-tax contributions.

For example, let’s say your IRA is worth $400,000:

$360,000 (90 percent) in pre-tax assets.

$40,000 (10 percent) in after-tax assets.

If you convert 25 percent or $100,000 of the total amount to a Roth IRA, the conversion amount will be taxed as follows:

$90,000 (90 percent) converts and is taxed.

$10,000 (10 percent) converts tax-free.

If you have multiple IRA accounts (traditional IRA, SEP-IRA, SIMPLE IRA or rollover IRA), this ratio will be based on the combined pre-tax and after-tax assets from all of your IRAs.

Here’s how the Roth conversion strategy works:

Before the Roth conversion: Beginning in 2007, Tom, age 35, began funding a traditional IRA with non-deductible after-tax contributions. He contributed $4,000 in 2007, then $5,000 in each of the following three years: 2008, 2009 and 2010, for a total of $19,000. By 2011, Tom’s IRA has grown to $23,000 ($4,000 in gains).

Tax treatment at conversion: Tom converts his traditional IRA into a Roth IRA in 2011. He owes no taxes on the $19,000 in contributions because they were made with after-tax dollars. He does owe $1,320, assuming a 33 percent income tax rate, in income tax on the $4,000 gain.

After the Roth conversion: After Tom converts the $23,000 to a Roth IRA, it continues to grow tax-free. If Tom keeps the money in the Roth IRA for 20 years and earns an 8 percent annual growth rate, the assets could grow to $107,000. He will owe no taxes on the distributions. Also, there are no required minimum distributions.


If you convert to a Roth IRA, you will need to pay taxes on the taxable portion of the conversion amount.

If you expect to be in a higher income tax bracket in retirement, converting to a Roth IRA now may help offset your tax burden later.

The more time you have until retirement, the greater potential for tax-free growth from a Roth IRA.

Your employer-sponsored retirement plan may also be eligible for conversion.

Converting may allow you to maximize estate transfer benefits to your beneficiaries.

Contact your financial adviser today to discuss the possibility of a Roth conversion. Together, you can evaluate whether a Roth conversion makes sense as part of your overall financial plan.