Strategy: Complete the rollover this year the old-fashioned way. Otherwise, you might as well wait until 2010 when a different tax break kicks in.
The whole story: Currently, it takes two steps to roll over assets from a qualified plan, such as a 401(k) or pension plan, to a Roth IRA. First, you transfer the funds tax-free to a traditional IRA. Next, you convert the traditional IRA to a Roth and pay the resulting tax.
Key point: The IRS allows conversions only in a year when your adjusted gross income (AGI) is $100,000 or less.
The new pension law allows direct rollovers for qualified plan distributions after 2007. (You pay no penalty for withdrawals before age 59 1/2.) But the income limit still applies.
Better tax break coming: Beginning in 2010, you can convert a traditional IRA to a Roth regardless of your income level. Plus, you can elect to pay the tax resulting from a 2010 conversion over the following two years. So, you effectively spread your 2010 conversion tax payments over 2011 and 2012.
Result: If you can drive your AGI below the $100,000 mark in 2006, your best approach may be the two-step conversion. If you can’t, you’re probably better off waiting until 2010 rolls around. That way, you benefit from the extra tax deferral.
- Small Business Tax Deduction Strategies No matches