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Delay taxes on 2010 conversions. Traditional IRA and 401(k) account balances can be converted to Roth accounts if you pay income tax on the amount converted. Those who make transfers in 2010 can choose between paying the tax this year or paying tax on half of the income in 2011 and the second half in 2012. "This gives you the ability to spread the out the payments over a couple of years versus having to pay it all in one year," says Shelley Ferro, a certified financial planner for Ferro Financial in Metairie, La. In future years, the tax must be paid entirely in the year of the transfer.
Space out conversions. A large conversion can result in a hefty tax bill and cause a spike in income that could impact your tax bracket, Medicare premiums, or your child's eligibility for federal financial aid for college. But you don't have to roll over your entire IRA balance in a single year. Spacing out the amount you convert each year can keep your annual tax bill reasonable. "It could be very expensive to convert all of your traditional IRA to a Roth," says Timothy Parker, a certified financial adviser for Hudson Capital Management in Ridgewood, N.J. "If you can convert chucks of it at a time and keep your tax rate low, that makes more sense."
High earners are now eligible. The IRS removed the $100,000 income limit this year, which previously didn't allow many high-income taxpayers to convert traditional IRAs to Roth IRAs. Although high earners won't be able to make new contributions to Roth accounts each year, they can get around this restriction by doing a conversion each year. "You could make a nondeductible contribution to your IRA and then convert," says Slott.
Convert your 401(k) balance to a Roth. The recently passed Small Business Jobs Act of 2010 permits employees to shift part or all of their 401(k) plan balance to a Roth 401(k) within the same plan. In 2010 only, 401(k) or 403(b) plan participants who roll over their assets to a Roth are eligible to pay the tax in 2010 or include half of the income in 2011 and half in 2012. The new law also allows government 457(b) plans to add Roth accounts beginning in 2011.
There's still time to contribute. Retirement savers can contribute up to $5,000 to an IRA in 2010 or $6,000 if they are age 50 or over. You have until your tax filing deadline to make 2010 contributions. Roth IRA conversions must be made by Dec. 31, 2010, to count for the 2010 tax year. If you later change your mind about the 2010 Roth IRA conversion, you have until Oct. 15, 2011 to shift your assets back to a traditional IRA.