Tax time is the time of year when many think about their retirement plans. There have been some changes with retirement accounts that might benefit you. In May of 2006, President Bush signed a tax cut provision called the Tax Increase Prevention and Reconciliation Act, changing the eligibility rules for Roth IRA conversions starting in 2010. For many years those who had modified adjusted gross income of more than $100,000 , whether they were filing as an individual or married filing separately, were not allowed to convert a traditional IRA to a Roth IRA. As of January 2010, if you fall into this category, you are now allowed to transfer a traditional IRA to a Roth IRA without regard to income or filing status. This change does not mean that anyone can fund a Roth IRA; however, it does mean that anyone can convert an existing IRA to a Roth IRA.

The 2006 law includes a special rule for conversions that take place in 2010. Unless you choose otherwise, the income from the conversion will not be reported on your taxes in 2010. The income will be spread into two equal installments in 2011 and 2012, which will help stretch the taxes paid over the two-year period. This modification in the tax law applies to all years beyond 2010, although in subsequent years the income will be included in the tax year in which the conversion is completed.

So you might be wondering why this would benefit you. When you retire and start taking distributions from your traditional IRA, you will be subject to income tax on the amount withdrawn since you used pre-tax dollars. If your retirement funds are converted to a Roth IRA, you pay the income tax so you are now using after-tax dollars. Any withdrawals you make at retirement will not be taxed, including any earnings on the Roth IRA. Also, with a Roth IRA, you are not subject to a Required Minimum Distribution when you reach the age of 70 ½.

There are some tax strategies to consider when attempting a conversion to help reduce the tax burden. If you are going to make a charitable commitment to a non-profit, prepay the pledge and use the charitable tax deduction to offset some of the income taxes owed on the conversion. Another option is to establish a charitable gift annuity for your favorite charity to take a larger deduction to help offset some of the taxes due. This can become a win-win situation for all involved.

One other thought when considering charities and qualified charitable distributions, taxpayers who have reached the age of 70 ½ can make a distribution of up to $100,000 directly from their traditional IRA to a charitable organization. This is a non-taxable action and is limited to the amount of the distribution that otherwise would have been taxable. There is no charitable deduction and the distribution counts towards the taxpayer’s required minimum distribution. If you have any further questions, please seek advice from your financial advisors.

Brandi Gray, Executive Director Miles Community College Endowment