What's the big mystery around Roth IRA conversions this year?
Not only were the income caps lifted this year—a big deal for those with a modified adjusted gross income of more than $100,000—if you convert to a Roth by December 31, 2010, you don't have to pay the conversion taxes right away.
How does a Roth conversion work, and why should you care?
With a Roth IRA, you can't deduct your contributions as you can with a traditional IRA. But the money grows tax-free—"and you don't have to pay any tax upon withdrawal in retirement," notes this clear-cut article on Bankrate.com.
Converting means that your tax bill could be much smaller than if you left the cash in a traditional IRA or 401k for many years, and ended up paying tax at a higher rate in retirement.
Until now, many folks haven't been able to convert because their incomes were too high: above $100,000 MAGI.
Starting this year, anyone can do a Roth conversion, regardless of income.
Naturally, you have to pay taxes on the conversion (Roths allow only after-tax dollars). But there's another perk: if you convert by Dec. 31, 2010, you can spread out the tax bill through 2012.
It's complicated, but if you run the numbers—or consult with a financial planner—this investment move might save you quite a bit down the line.
Not sure what a Roth is? Check out previous DailyWorth posts about IRAs: