Hello, my name is Brad Olson, and I am honored to be the featured writer for 50 Plus on financial planning and investment related subjects. I am a Certified Financial Planner and President of Oak Tree Financial Service, LLC located in Waukesha. Over the past 30 years, I have worked for a large insurance company, a large bank and most recently was Senior Vice President at Landaas and Company. I have decided to follow the old saying, "If you want to do it right, do it yourself,” therefore, I founded Oak Tree Financial Services.

The goal of this article will be to provide timely and relevant information about various financial planning topics. I want this to be an interactive article, so I would like you to submit any questions or thoughts you may have. To submit questions call 262-649-9202, email brad@otfsllc.com or send them to Oak Tree Financial Services, LLC, 2312 North Grandview Blvd., Suite 210, Waukesha, WI 53188.

The number of Google searches for information about Roth IRA conversions has increased dramatically recently. In fact, search data reveals that the number of people searching for the phrase “Roth IRA conversions” more than tripled between January and November 2009. (1)

This surge in interest about Roth IRA conversions is hardly surprising considering that starting in 2010, all taxpayers, regardless of income, are eligible to convert tax-deferred retirement assets to a Roth IRA. Prior to the change, the law prevented taxpayers with household incomes above $100,000 from converting assets to a Roth IRA.

If you are among the nearly 50 percent of Americans who believe their own taxes are going to increase, you may be interested in the possibility of a tax-free income that a Roth IRA conversion can bring.(2)

A Roth IRA is a retirement savings vehicle that differs from tax-deferred retirement accounts such as traditional IRAs and most employer-sponsored retirement plans. With a Roth IRA, you make contributions with after-tax dollars, but qualified withdrawals after age 59½ are tax-free. Furthermore, a Roth IRA does not require minimum annual withdrawals after age 70½. It should be noted that there are still annual income limits in place for determining eligibility to contribute to a Roth IRA. The income limitation was eliminated only for conversions.

To qualify for the tax-free and penalty-free withdrawal of earnings and amounts converted to a Roth IRA, the account 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 ($10,000 lifetime maximum).

Taxing Choices

When you convert tax-deferred assets from a traditional IRA and/or a former employer’s 401(k), 403(b) or 457 plan, the amount you convert in a given year needs to be declared as income on your tax return. If you are younger than age 59½ and pay the taxes from money that is not in the tax-deferred account (the recommended option), you can avoid a 10 percent federal income tax penalty.

Fortunately, you have options when it comes to paying the taxes on a Roth IRA conversion. In 2010 only, you can convert eligible retirement assets to a Roth IRA without having to claim the amount as income on your 2010 tax return. If you elect to do this, you must declare half of the converted amount as income in 2011 and the other half as income in 2012. In this way, you wouldn’t have to start paying taxes on a 2010 Roth IRA conversion until April 15, 2012.

However, by deferring the taxes on a 2010 conversion, the converted amount will be taxed at the income tax rates in effect in 2011 and 2012. As it stands, tax rates are scheduled to increase in 2011. Unless Congress acts to avert the tax rate increase, the taxes on Roth IRA conversions will be higher after 2010.

Also consider whether converting a sizable amount to a Roth IRA could move you into a higher tax bracket. If so, you may decide to convert smaller amounts over a period of several years.

If you have IRAs into which you have made both deductible and nondeductible contributions, the tax implications of a Roth IRA conversion can become complicated. It may be prudent to consult a tax professional.

You Can Change Your Mind Later

If you change your mind after utilizing a Roth IRA conversion, you can elect a “do-over,” called a re-characterization. The assets would be converted back to tax-deferred status and you can file an amended tax return seeking a refund of the income taxes you paid on the conversion. In order to qualify, you must re-characterize the funds before October 15 of the year following the year in which you converted.

Roth IRA conversions offer the potential for tax-free income in retirement for taxpayers at all income levels. If you want more information about converting to a Roth IRA, call today. It’s critical to review your individual situation before making a decision about moving important assets.

1) Investment News, November 16, 2009

2) Rasmussen Reports, September 3, 2009

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitute a solicitation for the purchase or sale of any security.

Brad Olson is a registered representative and investment advisor representative and offers securities and investment advisory services through Walnut Street Securities, Inc., (WSS) Member FINRA / SIPC. Oak Tree Financial Services, LLC. is a separate entity from WSS. Please feel free to call Brad with any financial planning and investment questions at 262-649-9202, or email him at brad@otfsllc.com.