Converting from a traditional IRA to a Roth IRA is a hot topic this year, says Karen Chan, Certified Financial Planner and Consumer & Family Economics educator at the University of Illinois Extension. "As of 2010, anyone is eligible to convert. This is the only year in which a taxpayer can convert but spread the taxable income across two years, 2011 and 2012. Barring new legislation, tax rates will increase in 2011," Chan says.
When you convert your traditional IRA, it is taxable, just as it would be under normal withdrawals. As money is withdrawn from a Roth, it is tax free.
Before 2010, there was an income limitation: You could only convert your regular IRA to a Roth if your adjusted gross income was less than $100,000, adds Paul Neiffer, CPA with HansonNvOPS. For many farmers, this meant they could not take advantage of converting to a Roth. "For 2010, you can convert your regular IRA into a Roth IRA without worrying about the $100,000 adjusted gross income limitation," Neiffer explains.
Since the income from converting to the ROTH is reported over two years, this means that if you convert $100,000 in 2010, you report zero income in 2010 and $50,000 each in 2011 and 2012.
A farmer can also decide to undo the conversion by the due date of their tax return for 2010, which means with an extension you have until October 15, 2011 to make up your mind if you really want to do the conversion or not, Neiffer adds.