Once you’ve rolled your assets into an IRA you might want to consider converting your account into a Roth IRA. Roth IRAs differ from traditional IRAs in a few ways:
- Contributions are nondeductible
- Account earnings and withdrawals are tax free as long as you follow the rules for withdrawal
- There are no required minimum distributions
- There is no withdrawal age limit
Tax-free earnings and no required minimum distributions may appeal to your retirement saving needs. However, you must qualify for a Roth IRA and pay the necessary taxes before you can convert your account.
To qualify for a Roth IRA conversion in 2008 or 2009, your adjusted gross income, or AGI, must be below $100,000 for the year you do the conversion. This limit applies to both married and single taxpayers. Once you qualify, you may convert your IRA directly or indirectly. These conversions are similar to direct and indirect rollovers—but you’ll have to pay taxes as a lump sum on any deductible contributions and any earnings in your traditional or rollover IRA.
In 2010, that income limit will be lifted, so anyone who wishes will be able to roll over a traditional IRA to a Roth IRA. What's more, you'll be able to spread the taxes that are due over two years. If you think this may be a good alternative for you, you should check with your tax professional to be sure you understand how the rollover must be handled.
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