Why pass up the new Roth-rollover break? — Business Management Daily: Free Reports on Human Resources, Employment Law, Office Management, Office Communication, Office Technology and Small Business Tax Business Management Daily
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Why pass up the new Roth-rollover break?

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in Small Business Tax

The new pension law—the Pension Protection Act—makes it easier for you to roll over assets from a qualified retirement plan to a Roth IRA. But the change doesn’t take effect until 2008.

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.

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