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Converting Traditional IRA to Roth IRA: 2010 Roth Conversion Rules

So, what’s next? Has your accountant or financial planner asked if you have given any thought to converting your traditional IRA to a Roth? In 2010, as it stands right now anyway, if you decide to convert your traditional IRA to a Roth IRA, the government is going to drop the limitations and they’re going to allow you to pay the income tax due over a two year period – that is, in 2011 and 2012. Now, let me ask you a question. Which is better? To pay the taxes when you buy the apple tree or when you pick the apples? The traditional IRA requires you to pay the taxes when you pick the apples. And so if you pick apples year after year, you’re going to pay taxes on every single apple that you decide to pick. That’s what the traditional IRA is about. You save the taxes when you buy the apple tree and you pay the taxes when you pick the apples. The exact opposite is true for a Roth IRA. You pay the income tax when you buy the apple tree, you nurture the apple tree and make it grow and finally, you can pick as many apples as you want without incurring an income tax.

Roth on Roids is better than the Roth IRA; however, there is one main similarity. You have to pay the taxes when you buy the apple tree (i.e. before you pick the apples). In other words, you don’t have to pay taxes when you pick the apples (i.e. after your already purchased the apple tree); in spite of that, with the Roth IRA there is no guarantee of a return and you’re going with the ups and downs of the stock market, the commodity market or the real estate market. With Roth on Roids, the principle is guaranteed; you will never lose your money because you’re guaranteed by an insurance company whose sole purpose is to roll the money tax free and then borrowing against it the cash builds up tax free. Likewise, when you go to a bank, you borrow money; it’s not a taxable transaction.

On conversions, the government is inducing you to pay the taxes now, to transfer the money into a Roth IRA. This conversion, over 18 trillion dollars has not been taxed in qualified retirement money. Approximately 9 trillion dollars is in individual retirement accounts, traditional IRAs. In 2010, you can withdraw the money, pay the tax, and put it in a Roth. The third choice is to take the money, pay the taxes and go into a Roth on Roids. No earned income, no age qualifications. The Roth on Roids still has a government intubation. It’s a government sponsored program.

With this being said, there is a word of caution. The government as of late has been buying banks and significant shares of the bankrupt General Motors and almost defunct Ford. In essence, they will be running the economy. They also seem to be haphazardly making and printing money without major forethought – a trillion dollars here and a trillion dollars there. It’s this spontaneous change of mindset of the government that worries me. With such a significant asset class under their control (this includes the Roth IRA) they can easily and spontaneously change the rules and apply some new tax upon the IRA account or they can just as easily require a mandatory distribution. This is a possibility. Politicians change their minds everyday and, well, we’ll have to leave it just at that. Actually, I’m a little bit worried about that because I think they’re acting like they’re protecting themselves against us – the tax payers. However, that’s another discussion for another day.

Call us for more information about your own specific IRA conversion retirement planning. I believe you should strongly consider the Roth on Roids as part of your asset allocation strategy today. Call us today toll-free at (888) 938-5872 or (508) 429-0011 for your Best IRA Rescue Plan. We are open 7 days a week.

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