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R. Scott Maxwell, MBA

I have some really good news for you.

You may be able to roll over your existing IRA, SEP, SIMPLE IRA, 403(b) and 401(k) accounts into a Roth IRA in 2009 and insulate your retirement account from future federal income taxes.

But wait, you say. You thought Roth conversions are only available in 2010?

Fortunately, anyone reporting less than $100,000 in adjusted gross earnings (and as long as they are not married filing a separate return) can convert their retirement account into a Roth IRA now and begin receiving the benefits of tax free growth and future tax free distributions that only a Roth IRA offers.

2010 is the year the $100,000 adjusted gross income limitation is eliminated; meaning even more of us will be able to convert our retirement accounts into a Roth IRA.

So, what’s the big deal, you ask? What makes a Roth IRA preferable to a traditional IRA, 401(k), et al. and why should I consider converting my qualified savings to a Roth IRA right now?

The primary difference between traditional qualified plans (IRA, SEP, SIMPLE IRA, 401(k), etc.) and a Roth IRA is the tax status of the money you contribute to the different plans. Contributions to a Roth IRA are made with after tax money. Contributions to an IRA or 401(k) plan are traditionally made with before tax money, meaning your taxable income is reduced by the amount you contribute to the qualified plan.

All of these plans grow tax deferred, however the Roth IRA allows you to make tax free withdrawals once you reach age 59 ½. The other retirement plans require you to pay taxes on your withdrawals.

Insulation from the payment of taxes on future retirement savings is often incentive enough to encourage investors and retirees to investigate a Roth conversion. Other advantages include:

1. Eliminate traditional IRA required minimum distributions. The government requires you to begin paying taxes on your IRA, and other qualified accounts, once you reach 70 ½. They do this by forcing you to withdraw a specific amount from your qualified account, as determined by the required minimum distribution, or RMD, table in IRS Publication 590. Your annual required minimum distribution is reported on your tax return as income, and all applicable taxes are paid on the amount. There are no required minimum distribution requirements in a Roth IRA.

2. Protect your retirement savings from future tax increases. IRA distributions are treated as ordinary income. Future tax increases will drain a proportionally larger amount of your retirement nest egg as you make withdrawals. A Roth IRA insulates you from future tax increases because all withdrawals are made tax free.

3. Leverage the compounded growth of your retirement savings. All qualified plans allow your savings to grow without the burden of taxes. This means you earn interest on your principle, earn interest on your interest and earn interest on the amount that would have been taken from you to pay any applicable taxes on your gains. A Roth IRA leverages the compounding benefits of tax deferral by eliminating taxes on all withdrawals. You not only get to grow your retirement savings without the burden of taxes, you get to keep all that additional growth.

4. Manage, or potentially avoid, taxes on Social Security benefits. Did you know your Social Security benefits in retirement are taxed if you are married and your income from any pensions, interest earnings, IRA distributions (either voluntary to pay for your retirement or required minimum distributions) and ½ of your social security payments exceed $32,000? Roth IRA distributions do not count towards the $32,000 income calculation threshold (the threshold is only $25,000 if you are single), thereby allowing you to manage (or potentially avoid) paying taxes on your Social Security benefits.

5. Stretch the power of tax free growth to your heirs. The tax advantages of a Roth IRA pass on to your heirs (with certain stipulations), meaning they can continue to receive the benefits of tax deferred growth and tax free distributions over their lifetime.

These are powerful benefits that form the foundation of a magnificent retirement strategy.

So, what is the catch? We all know that when the government gives they usually want something in return.

In this case, the government wants its share of taxes now.

Taxes must be paid on all pre-tax qualified savings converted into a Roth IRA from traditional IRAs, 401(k)s, and other applicable qualified plans. Additionally, anyone under 59 ½ cannot use any of the converted funds to pay their taxes without incurring a 10% early withdrawal penalty. There are no early withdrawal penalties for the conversion itself, regardless of age.

Obviously, no one enjoys paying taxes. Putting payment off for another day may be the best alternative for many investors. One additional advantage of waiting until 2010 to convert your retirement account into a Roth IRA is the one time provision that allows you to report half the conversion on your 2011 tax return and half the conversion on your 2012 tax return, thereby spreading your tax costs over those two years.

On the other hand, converting your qualified retirement account into a Roth IRA today may allow you to put the pain of 2008 to good use. Most investors suffered losses in 2008, meaning they now owe less tax on a Roth conversion based on their current account value. A future market rebound, along with the very realistic chance of higher future taxes, may result in a higher tax bill in the future should you eventually decide to take advantage of the benefits of a Roth conversion.

Additionally, there are now investment strategies that offer a deposit bonus of up to 10% on all invested assets. This means a $100,000 Roth conversion is immediately credited as if the conversion totaled $110,000. While this bonus program might not be suitable for everyone, it is one more benefit to add into your decision making process.

The suitability of any Roth conversion depends on your specific circumstances and I encourage you to talk to a tax professional prior to making any decisions. You must understand the tax consequences, restrictions and requirements of a Roth conversion to avoid making costly mistakes.