By taking advantage of the tax law signed by President Bush in May 2006 that repeals the $100,000 income limit on the Roth conversions, this will be the case for those retirement accounts after 2010. That’s right…IRA’s, 401(k)’s from previous employers, etc. that are converted to a Roth IRA will grow tax free and provide a future income to you and your heirs tax free-and, beginning this year (2010), this conversion is available to high income earners that previously were not eligible to convert. Still confused?

There are primarily two benefits that Roth IRAs have over Traditional IRAs and other qualified retirement plans:

1. Earnings on a Roth IRA accumulate income tax-free unlike a traditional IRA, whose assets grow tax deferred and you pay subsequent taxes when those assets are withdrawn, and;
2. There is no required minimum distribution at age 70 ½ unlike a traditional IRA.

However, there are three additional reasons you may want to consider converting some or all of your traditional IRA or qualified retirement plan assets to a Roth IRA in 2010.

But first, let me give you the bad news, though you may have already figured it out: You have to pay the taxes on the amount that you convert to a Roth. The first piece of good news is, though, for the year 2010 only, Uncle Sam has thrown in a little incentive. You can opt to have none of the converted funds taxed for 2010. The conversion income may be split over the following two years. The first installment isn’t due until the 2011 tax year. For example, if you convert $50,000, $25,000 will be considered taxable income for the year 2011 and $25,000 will be considered taxable income for 2012. Just be careful…if your income were to rise in either of these years this could put you in a higher tax bracket. It is a good idea to consult with both your financial advisor and tax professional before deciding to make the change in 2010.

The second reason-over the past 15 years we have taught retirement classes through various colleges’ continuing education departments in an effort to help retirees and future retirees have the tools and knowledge to make wise decisions regarding their futures. In years past it was wise to acknowledge a declining trend in income tax rates, which meant deferring income taxes whenever possible and using other tax strategies that would push taxes forward. Nevertheless, all good things must come to an end. There are many indicators that this trend will reverse and income taxes will be headed up in the upcoming years. So converting to a Roth IRA and paying the income tax due on the conversion now may be more advantageous than paying taxes in the future when rates could be higher. P.S. Marginal tax rates for higher income earners are currently at historical lows.

The last reason presents itself with this question, What is the value of your qualified retirement account these days? Over the past 12 to 18 months many accounts took a huge hit due to our financial markets. Let’s just say you had a retirement account worth $100,000 in 2007 and its current value is $75,000. The conversion amount of this IRA would be $75,000, which means you will only pay income tax on $75,000, not $100,000. That Newton was a wise man-for every negative there is a positive.

As with any information we provide, it is merely generic. It is important to work with your advisor and tax professional to determine whether or not a Roth IRA conversion is right for your unique situation. However, not addressing this opportunity and determining whether or not it fits your situation may hurt you over the long term. As I always say, It’s what you don’t know that you don’t know that could hurt you. The tax code provides us all kinds of opportunities to grow our future; do you know how these can apply to your situation?

Remember that tax laws are subject to change, and it’s possible that the taxability rules of Roth IRA’s could change.

Securities & Advisory Services offered through VSR Financial Services, Inc., a Registered Investment Adviser and Member FINRA/SIPC. Kennedy Financial Services is independent of VSR Financial Services, Inc. VSR does not provide tax or legal advice.