Roth IRA Conversions for Estate Plans

Effective January 1, 2010, the income tax limit for transferring assets from a traditional Individual Retirement Account (IRA) to a Roth IRA is permanently dropped. These conversions will be subject to income tax, but future withdrawals (that meet holding requirements) will be tax free.

There are three options for paying income taxes throughout the year and thereby avoiding penalty and interest for underpayment of income tax when the conversion is made:

1) Pay 100% of last year’s tax (110% if your Adjusted Gross Income was over $150,000). Then pay any income tax for a 2010 Roth conversion as part of the 2010 tax return.

2) Pay 90% of the current year’s tax. If a large amount is being converted to a Roth in 2010, this is a way to have less to pay quarterly or have withheld from your paycheck in 2011.

3) Estimate your income each quarter and pay tax on it for that quarter. You can have the tax withheld from your paycheck, make quarterly payments or a combination of both.

Roth IRA conversion will also affect your Illinois Income Tax Return.

Contact an estate planning law firm for further information.