Why Convert to a Roth IRA?

2010 Roth Conversions: Tax Reporting Options
If you convert to a Roth IRA in 2010, you’ll have the option to either³:

• postpone the tax payment by reporting 50% of the conversion amount as income on your 2011 income tax return—and the remaining 50% on your 2012 tax return; or
• report 100% of your conversion amount as income on your 2010 income tax return.

The Benefits of Roth IRAs

• You’ll pay no federal taxes on your Roth IRA withdrawals (including your account’s investment earnings) if you meet certain requirements¹.
• You may withdraw your own contributions (but not your account’s investment earnings or any money contributed to your account through a conversion⁴) at any time, tax- and penalty-free.  Separate holding period requirements for penalty-free withdrawals apply to amounts that were converted to a Roth IRA.
• If you qualify, you can contribute up to $5,000 or your taxable compensation for the year—whichever is less—to a Roth IRA for 2009. You may contribute up to $6,000 if you are 50 or older by December 31. These same limits are in place for contributions made in 2010. (Even if you do not qualify to make contributions to your Roth IRA account, you can still benefit from converting your traditional IRA assets over to a Roth IRA account.)
• Unlike a traditional IRA, with a Roth IRA, there are no guidelines that require you to begin taking withdrawals within a certain time frame.

Before You Convert to a Roth IRA…

However, the decision to convert needs to be made with care and isn't for everyone. Be sure to consider, among other things, your personal tax situation, including expected future tax rate, the time you have until you'll need the money, and the opportunity costs of using "cash" to pay the tax liability. As with any tax-related issue, it's a good idea to check with your tax advisor before making any decisions.

You may wish to check out our handy Roth IRA Conversion Calculator to help yourself determine if a Roth IRA conversion may be right for you.

Before you initiate a Roth IRA conversion, you may wish to consult a financial professional to ensure that you understand the IRS’s Roth IRA conversion guidelines. If you prefer, a Certified^* Prudential Retirement^® Counselor can assist you. Simply call 1-877-PRU-2100 toll free, Monday through Friday, from 8 a.m. to 6 p.m., ET.

^* Many of Prudential Retirement’s Personal Retirement Services Retirement Counselors carry the distinct designation of Certified Retirement Consultants, an advanced certification available through the International Foundation for Retirement Education (InFRE). Certification includes mastery of retirement plan design, investment strategy, retirement income management, and retirement readiness and counseling.

¹ In order for distributions to be made from a Roth IRA free of penalties and federal income taxes, your Roth IRA must have been established at least five tax years before the withdrawal (period begins with the tax year for which your first contribution is made) and your distribution must be: a) made on or after the date you attain age 59½; b) made to your beneficiary or your estate after your death; c) attributable to your being disabled; or d) taken because you are a qualified first-time home-buyer (lifetime limit of $10,000). Separate holding periods apply to amounts converted to a Roth IRA.

² For tax year 2009, you may contribute to a Roth IRA if you have taxable income and your modified Adjusted Gross Income does not exceed: a) $176,000—if you are married, filing jointly or a qualifying widow or widower; b) $120,000—if you are filing as single, head of household, or are married, filing separately, and did not live with your spouse at any time during the year; or c) $10,000—if you are married, filing separately, and lived with your spouse at any time during the tax year. For 2010, the applicable Adjusted Gross Income limits are $177,000, $120,000 and $10,000, respectively. The amount that may be contributed to a Roth IRA begins to phase out beginning at $10,000 below these income limits.

³ The deadline for re-characterizing a 2010 Roth conversion is October 15, 2011. If a re-characterization is not done by that date, the taxpayer will be locked into any tax liability from the conversion, including reporting income ratably over 2011 and 2012, if applicable.

⁴ Any withdrawals you make of conversion dollars within five years of conversion or of your account’s investment earnings before reaching age 59½ may be subject to a 10% federal income tax penalty.