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Multiple Roth Conversions and More in Mailbag

We have 3 questions from concerned consumers who want to make sure they are not just giving money away in unwanted taxes to the federal government. Enjoy the 4th of July holiday with friends, family and fireworks! As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure.


Can I chose to pay federal income tax (and state) on some of my Roth conversions during 2010 and spread the other Roth conversions over two years (2011-2012), or do I have to do all/multiple Roth conversions at the same time?

On Roth IRA conversions in 2010 you can add the conversion amount (taxable portion) to your 2010 tax return or add the conversion amount equally over your tax returns in 2011 and 2012. You must elect one or the other for all of your 2010 conversions.

If, however, you are married and your spouse is doing a Roth IRA conversion in 2010, they can choose a different tax option than you. Whatever method they chose would apply to all of their 2010 conversions.

For example: on your conversion you decide to spread the income from the conversion over years 2011 and 2012 and your spouse can chose to pay the income tax on the conversion in 2010. Also, keep in mind if you decide to spread the income over 2011 and 2012, IT MUST BE EQUALLY. You can not add different amounts for each year.


I would like to start a business (buy a franchise and partial ownership in the franchise company) using my 401(k). I have heard about ROBS programs. Any thoughts with regard to the validity of the program? I am 36 years old and currently unemployed.

The ROBS transactions are allowable under the tax code. However, IRS is paying very, very close attention to those who utilize the strategy. It is all too easy for an account owner to make a mistake and create a prohibited transaction in the new company. If the problem is serious enough, it could cause the entire 401(k) plan in the new company to be disqualified, which would mean that all funds in the 401(k) would become taxable to all plan participants.


What are the income limits for converting Roth IRAs next year. We thought originally it was unlimited this year only and now we believe that it is unlimited going forward and anyone any year can convert their IRAs to Roth IRAs no matter what income they make.


You are absolutely correct. The income limit of $100,000 has been eliminated permanently. Everyone, regardless of income, can now convert to a Roth IRA in 2010 and beyond.

By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
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*Copyright 2010 Ed Slott and Company, LLC


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