These answers are informational only and are not intended to address all possible situations that might arise with respect to the question asked. You should check IRS Publication 590 for more information (keep in mind that the IRS does not stand behind any advice they give) and check with a qualified advisor before doing IRA transactions and especially before trying to correct something that may be wrong. Any tax advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding tax or penalties
 

SOME FACTS

 
Generally speaking, what are the advantages of a Roth IRA?
 
• Distributions of earnings are income tax-free when certain conditions have been met. (see below).
• There are no required minimum distributions when you reach age 70 ½.
• Beneficiaries can receive tax-free income if the account has been open for five years.
 
I keep hearing there are major changes in Roth IRA’s for 2010, what are they?
 
• Starting in 2010 there is no longer an income limitation when converting to a Roth IRA.
• Individuals can spread taxes from conversions done in 2010 over two tax years – 2011 and 2012.
 
What are the general tax consequences of converting my retirement account to a Roth IRA?
 
• The pre-tax contributions and tax-deferred earnings will be taxed as ordinary income at the time of on version. As previously stated that can be spread over tax years 2011 and 2012.
 
What types of retirement accounts can I roll over to a Roth IRA?
 
•Traditional IRA, Rollover IRA, SEP IRA, SIMPLE IRA (subject to 2 year holding), SAR-SEP IRA, old 401(k), old 403(b), old governmental 457(b).
 
When can I withdraw funds from a Roth IRA?
 
• Your basis can be withdrawn from a Roth IRA at any time. Your basis is amounts contributed, converted, or certain amounts you have rolled over from a Roth 401(k) or Roth 403(b). You do not pay taxes on your basis because you paid taxes on those amounts when they went into your Roth. A distribution from your Roth is considered to first come from contributions, then converted amounts, and lastly from earnings.
• You can start to take tax free distributions when you have had your Roth IRA for 5 years AND are over the age of 59 ½, or dead, disabled, or taking out funds under the first time home buyer exception. If you are under the age of 59 ½, the 10% early distribution penalty will apply.
 
I keep hearing the term ‘Recharacterization’ what is that?
 
• Recharacterization is a provision which allows you to convert back to a traditional IRA. For example, if you convert any time in 2010, you have until October 15, 2011 to recharacterize. (The due date of your tax
return plus extensions).
 

SOME CONSIDERATIONS

 
Keep in mind that these considerations are general and informational. They are no substitute for a personal evaluation of your particular situation with a financial advisor and a tax professional.
 
What is the amount of taxes you will owe on conversion and what means do you have to pay them?
 
• Paying taxes is one of the biggest factors to consider when contemplating a Roth IRA conversion. The higher the balance in your IRA(s), the higher your tax bill will be if you convert.
• It is generally a bad idea to pay the taxes from your existing IRA or qualified plan.
• Keep in mind that taxes due from converted assets in 2010 can be deferred until 2011 and 2012.
• Remember that the new regulations allow for partial conversions.* You do not have to convert the totality of your retirement accounts to a Roth IRA. (*Multiple IRA accounts with non-deductible contributions must all be converted proportionally. You can convert any IRA accounts or make a partial conversion from one or more of them, if your contributions were all tax deductible.)
 
What are some reasons I would want to convert to a Roth IRA?
 
• Converting or partially converting can be an effective strategy to hedge against the possibility of future tax-rate increases.
• If your current IRAs have experienced market losses, converting now can reduce taxes and position you for tax-free growth as the markets recover.
• It can be beneficial for your estate. Distributions from Roth IRAs are generally not required until inherited by non-spouse beneficiaries, such as children, who receive this income free of taxes. Additionally, these benefits can opt to “stretch” required distributions over their life expectancy, thus preserving the Roth IRA for years.
• Your state law provides bankruptcy protection to Roth IRAs. (Illinois provides protection)
• You are not required to take distributions at age 70 1/2.
 
What are some reasons I would not want to convert to a Roth IRA?
 
• If you do not have liquid assets outside of retirement accounts to pay the taxes due on a Roth conversion. Using IRA assets to pay the tax bill generally results in paying higher taxes and may involve early withdrawal penalties, depending on the taxpayer age.
• If you need the income in the next 5 years. There is a 10% penalty for premature distributions.
• Your state law does not provide bankruptcy protection to Roth IRAs.