Beginning in 2010, under the newly-enacted legislation, the income and
marital status restrictions that limit the ability of a taxpayer to convert a traditional IRA to a Roth IRA have been removed, leading to some interesting and very advantageous tax and estate planning strategies.

Under prior law, an individual was allowed to convert a traditional IRA into a Roth IRA if the taxpayer’s adjusted gross income (AGI) for the year (without the income from the converted IRA) was $100,000 or less. The $100,000
limit is figured without regard to required minimum distributions from an IRA. Although the income is taxable, the 10% early withdrawal penalty does not apply. Beginning in 2010, the new legislation:

(1) Eliminates the $100,000 modified AGI limit on conversions of traditional
IRAs to Roth IRAs, and
(2) Permits married taxpayers filing a separate return to convert amounts in a traditional IRA into a Roth IRA. Under prior law, married taxpayers who filed separate returns were restricted from making conversions.

Special 2010 Income Inclusion Rule: For conversions made in 2010, the taxpayer can choose to elect to:
• Include the income in the 2010 return, or
• Include one half of the conversion income in 2011 and one half in 2012.

Note: 2010 is the last year for the current “low” tax rates unless Congress extends them in future legislation.

Income from conversions made in a year after 2010 will be taxable in the
year of the conversion. There are also a number of special rules regarding early distributions with respect to conversions.

Looking Ahead - There are some interesting strategies a taxpayer can employ to convert nondeductible traditional IRA contributions to a Roth IRA, thereby funding the more favorable Roth IRA.

• Strategy - Taxpayers who have employer plans and are restricted
  from making deductible traditional IRA contributions because of in-
  come level can make nondeductible traditional IRA contributions in the three tax years leading up to 2010, and then convert those non-deductible traditional IRAs to Roth IRAs with virtually no tax
  since they were nondeductible. Only the earnings would be taxable. Taxpayers who are prohibited from making Roth IRA contributions because their income exceeds the limit may also benefit from this strategy.
  
  
• Strategy - Using the same strategy above, even a taxpayer who can make a deductible contribution can elect to make it nondeductible, providing the same result as above.
  
  
• Strategy – Generally, rollovers are thought of as transfers from a qualified plan to an IRA or from one IRA to another IRA. However, beginning in 2002, the law has allowed the taxable part of an IRA to
  be rolled (or transferred) to other qualified plans including 401(k)
  plans, 403(a) and 403(b) annuities and 457 governmental retirement plans (assuming the plan will accept the IRA funds). For taxpayers
  who have mixed IRAs (including both deductible and nondeductible contributions), this provides a means to segregating the taxable and nontaxable amounts and then later converting the nontaxable portion without paying any conversion tax (except on any interim earnings). Thus, the taxable portion can be rolled into a qualified plan, leaving
  the nontaxable portion in the IRA where it can be converted to the
  Roth IRA.
  
  
• Strategy - More aggressive taxpayers with the financial resources
  to pay the rollover tax might also consider rolling (or transferring) the funds from a qualified plan into a traditional IRA and then converting
  the traditional IRA to a Roth IRA.