Like a traditional IRA, a Roth IRA accumulates on a tax-deferred basis. Unlike a traditional IRA, qualifying distributions from a Roth are federal income tax-free. And during the participant’s lifetime, no minimum distributions from the Roth IRA are required.

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With the new rules that go into effect in January, 2010, taxpayers with incomes of more than $100,000 will be able to convert a traditional IRA into a Roth IRA.

For conversion in 2010, the taxpayer will also have the option to defer the federal income tax liability for the conversion to 2011 and 2012.**

An individual may consider converting a traditional IRA to a Roth IRA in the following situations:

1.They expect the IRA to grow substantially, and would prefer to pay taxes on the lower current account balance instead of on the expected larger future amount.    

So Why Would Anyone Ever Choose to Convert
a Traditional IRA to a Roth IRA?
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2.They expect that the post-retirement income tax bracket will be the same or higher than the current one.
3.They expect to live for a long time after conversion, and the individual does not want to have to take distributions from the IRA if they are not needed—preferring the money to be for the ultimate benefit for heirs.

Does a Roth IRA conversion make sense for everyone? No. Have your client contact their tax advisor to see if a conversion makes sense for them. If it does, then contact your Financial Planner for more information and he or she can put you in touch with our Advanced Planning resource to help you with this and other more difficult retirement and estate planning questions: 

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*Please remember converting your traditional IRA to a Roth IRA is a taxable event and could result in additional impacts to your personal tax situation, including the taxation of current social security benefit payments. It is generally preferable that you have funds to pay the taxes due upon conversion from funds outside of your IRA. If you elect to take a distribution from your IRA to pay the conversion taxes, please keep mind the potential consequences, such as an assessment of product surrender charges or additional IRS penalties for premature distributions.

**For IRAs converted to a Roth IRA in 2010 the taxes due as a result of the conversion may be paid at the time of conversion, or spread out over two years after the conversion.

It is important to note that the taxes due will be based upon the tax rates in effect at the time of payment, and tax rates may be higher or lower than those in effect at the time of the conversion. Please consult with your tax advisor to discuss which payment option is appropriate for your personal tax situation.

This material is intended for educational purposes only and is not intended to serve as the basis for any investment or purchasing decisions.
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