§ New rule in effect on 1/1/10: the $100,000 income limit disappears for converting traditional IRAs to Roths
§ Traditional IRA, investors must begin tapping their accounts after reaching age 70 1/2, which increases taxable income
§ Roth: virtually all withdrawals are tax-free
§ Roth: no required distributions
§ Roth conversion: can be expensive as it requires paying income tax on all pretax contributions and earnings included in the amount converted
§ Conventional Wisdom: conversion only makes sense only if an investor can pay the tax from funds outside the IRA itself - the more IRA dollars you can transfer to a Roth, the bigger the Roth -- and the bigger the chance for long-term, tax-free growth.
§ New Wisdom: but, even though individuals who convert and who decide to pay the tax bill with funds inside their IRA are lowering their overall IRA balance, their new Roth account eliminates the requirement to make taxable withdrawals after age 70 1/2.
§ Roth asset base: 5% of $3.7 trillion IRA assets
§ Vanguard prediction: 5% of its customers will do Roth conversions in 2010, up from a typical 1.5% rate.
§ Note: Investors under age 59 1/2 who convert to a Roth would pay an early-withdrawal penalty on IRA assets used to pay tax.
Source(s): WSJ, Vanguard, Charles Schwab