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Timing is Everything When Converting Traditional IRA to Roth IRA


We have all heard the saying - "timing is everything". If you have ever considered converting your traditional IRA to a Roth IRA, 2010 may be the right time for you savvy investors. Lets take a look at some reasons why choosing to convert, sooner rather than later, may reap more rewards for investors now than it has in times past or in times to come: 2010 presents us with some limited-time offers that may be just the push you've been looking for.

Today conversion is only an option for investors whose modified adjusted gross income is less than $100,000 per year. Starting the first of the year, this income restriction will be lifted, allowing higher income earners an opportunity to convert a portion of their traditional IRA into a Roth. Keep in mind however, that this opportunity will expire at the end of 2010. For many this brief window of opportunity is reason enough to convert. Another shot in the arm for investors that convert in 2010 will be the ability to defer the traditional tax hit that is commonly associated with converting to a Roth IRA across 2011 and 2012. When converting an IRA to a Roth IRA, taxes will be due on the amount that is being converted, due to the fact that when the funds were initially deposited in the traditional IRA they were untaxed. For many this tax obligation was reason enough not to convert to a Roth; but with the ability to pay the taxes due, over a few years instead of all at once - the "sticker shock" effect of those taxes will be greatly diminished.

In todays market, it is not uncommon for investors to have lost twenty or thirty percent or more of the total value of their traditional IRA, compared to what they had built up to approximately eighteen months ago. With many financial analysts predicting that the recession is on the way out the door, now would be the time to take advantage of the markets decline, as your taxable balance that is being transferred is significantly less than it would have been in the past when markets were at their peaks.

If you listen to the financial experts as opposed to the politicians, taxes may be at the lowest rates that we will ever see again in our lives. It is no secret that the government's way out of the recession is to spend trillions of more dollars. The bottom line is that the trillions of dollars that are being spent to stabilize financial institutions, the manufacturing industry and health care have to come from some where. Understanding that some of the funds can be realized through decreased spending in some areas, and cost saving measures in others, a significant portion is still going to come from the taxpayers. If taxes are not raised by the current administration as promised, then the dirty work will have to be done by the next administration or the administration after that.

Time will apparently be of the essence, for many investors, when converting from a traditional IRA to a Roth IRA. With income restrictions temporarily lifted for one year, the conversion to a Roth will now be an option for almost everyone. Traditionally, lump sum tax payments on balances transferred would be deferred across 2011 and 2012. Lower balances available to transfer and with what should be the lowest tax rates we will see for decades to come; for those that have thought about converting to a Roth IRA in the past, but did not know if it was the right move for them or if the timing was right, 2010 looks like the opportunity you may have been waiting for. Just keep in mind that now is the time to get ready to take action, as some these benefits are a limited time offer.

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