Tax-saving opportunities continue for retirement planning due to the availability of Roth IRAs, changes that make regular IRAs more attractive, and other retirement savings incentives.  As discussed herein, a few more changes began in 2009.

Roth IRA Conversion Rule: Funds in a traditional IRA (including SEPs and SIMPLE IRAs), §401(a) qualified retirement plan, §403(b) tax-sheltered annuity or §457 government plan may be rolled over into a Roth IRA. Such a rollover, however, is treated as a taxable event, and you will pay tax on the amount converted. No penalties will apply if all the requirements for such a transfer are satisfied.

A taxpayer's AGI (whether married filing jointly or single) is limited to $100,000 to make such a conversion and the taxpayer must not be a married individual filing a separate return. The AGI limitation does not apply to conversions from a Roth designated account in a §401 or §403(b) plan. Beginning in 2010, the $100,000 income limit on Roth IRA conversions is repealed, and taxpayers will be able to make Roth IRA conversions without regard to their AGI. If you are eligible to convert to a Roth IRA in 2010, you will have the option of spreading the income ratably over two taxable years (2011 and 2012). This is a complicated calculation and we should meet to determine what your best options are.

Should you consider making the rollover to a Roth IRA?  The answer to this question is based on several factors.  One of which is whether or not you can pay the tax hit on the rollover with non-retirement-plan funds. Keep in mind that if you use retirement plan funds to pay the tax on the rollover, you'll have less money building up tax-free within the account. Another factor is whether or not you anticipate paying taxes at a higher tax rate in the future than you are paying now. Many observers believe that tax rates for upper middle income and high income individuals will trend higher in future years.  Also, if you have a number of years to go before you might have to tap into the Roth IRA. This will give you a chance to recoup (via tax-deferred earnings and tax-deferred payouts) the tax hit you absorb on the rollover.

Required Minimum Distributions: For 2009 only, taxpayers may waive taking their required minimum distribution. Thus, for 2009, no minimum distribution is required from IRAs or defined contribution plans (§401(k) plans, §403(a) and (b) annuity plans, and §457(b) plans that are maintained by a governmental employer). As a result, a person who attains age 701/2 in 2009 is not required to take a distribution by April 1, 2010. This provision will help keep your AGI low as your taxable income will not have to absorb a distribution from your retirement account.

Maximize Retirement Savings: In many cases, employers will require you to set your 2010 retirement contribution levels before January 2010. You may want to increase your contribution to lower your AGI in order to take advantage of some of the tax breaks described above. In addition, maximizing your contribution is generally a good tax-saving move.

If you have any questions concerning these topics, please contact one of our tax professionals.