Thanks to the Pension Protection Act of 2006, converting traditional IRA assets to a Roth IRA, or rolling over employer-sponsored retirement plan assets to a Roth, has become more attractive.

No Income Limit
Currently, only taxpayers with adjusted gross incomes of $100,000 or less are eligible to convert traditional IRAs and employer plan assets to Roth IRAs. The pension law abolishes the income limit, but the rule doesn't take effect until 2010.

Although there is no limit to the amount of assets that can be converted to a Roth, those aged 70½ and older must take the annual required minimum distribution, which is taxable as ordinary income, before converting tax-deferred retirement plan assets to a Roth.

Even investors who are below the current $100,000 income restriction may benefit by waiting until 2010 to convert to a Roth, because that is the only year in which the IRS will allow the tax bill to be spread out over three years.

Pick a Plan, Any Plan
Before 2008, qualified investors could only convert traditional IRA assets to a Roth IRA. But a recent tax-law change revised the rules so that, starting in 2008, investors can also make direct rollovers from employer-sponsored retirement plans to Roth IRAs. Of course, investors must treat the rollovers as Roth conversions, and the income limit still applies until 2010.

Roth IRAs offer some unique benefits. Probably the most popular reason for converting to a Roth IRA is the opportunity to receive withdrawals that are free of federal income tax after age 59½. Another benefit of a Roth is that there are no mandatory distributions during your lifetime, unlike the case with traditional IRAs and most employer-sponsored retirement plans.

When you convert assets to a Roth IRA, you must pay income taxes that have been deferred on qualified retirement plan assets. You can convert the funds all at once or over multiple years. In general, the amount you convert in a given year is included in your gross income when you calculate your taxes.

To qualify for the tax-free and penalty-free withdrawal of earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59½ or as a result of death, disability, or a first-time home purchase (up to a $10,000 lifetime maximum).

Distributions from traditional IRAs and most employer-sponsored retirement plans are taxed as ordinary income and may be subject to an additional 10% federal income tax penalty if withdrawn prior to age 59½.

Do the prospects of a tax-free retirement income sound appealing to you? Call today to discuss a Roth conversion.