2. Married couples who file separately are now allowed to make Roth IRA conversions.
Under the prior rules, married couples who filed separately were not allowed to convert to Roth IRAs (unless they have lived apart for more than one year). The rule changes in 2010 allow married couples who filed separately to convert to a Roth IRA.

3. You can make a partial Roth IRA conversion.
Making a Roth IRA conversion does not have to be an all or nothing decision. Although the rules surrounding partial conversions can be complex, a competent financial professional can help you understand the tax impacts and rules that govern converting some, all or none of your existing IRA to a Roth IRA. Like any other decision, all of the variables of your particular situation should be considered so you can make an informed decision. You should consider running the numbers for your situation to best determine the impact of making a full or partial conversion to a Roth IRA.

4. What is your age and time horizon?
Should you elect to convert to a Roth IRA, there is a 10% federal penalty on any withdrawal made within the first five years from that Roth IRA. Also, like with other retirement accounts there is a 10% federal tax penalty on any withdrawal made prior to the age 59 ½ (unless an exception applies). This needs to be factored in when making your decision as to whether or not you should convert all or some of your IRA funds to a Roth IRA.

An advantage of the Roth IRA is that investors over the age of 70 ½ are not subject to Required Minimum Distributions (RMDs) and therefore those investors who do not need to use the money to live off can continue to grow these funds tax-exempt. A qualified financial professional can help you map out, based on your age and time horizon, a strategy that is most likely to avoid or minimize the impact of penalties involved with Roth IRA conversions.

Although Roth IRAs have been available since 1997, starting in the year 2010 many financial firms and companies started marketing campaigns discussing Roth IRA conversions.

Prior to the year 2010 there were income limits to both contributing and converting to Roth IRAs. However, the Tax Increase Prevention and Reconciliation Act (TIPRA) of 2005 made some modifications to those rules starting in 2010 that still apply today. For over a decade, Roth IRAs were available only for individuals under certain income limitations. Income restrictions still exist in terms of contributions to a Roth IRA; however, in 2010, changes have removed these restrictions for Roth IRA conversions. These changes have opened a window for investors who were previously excluded from converting to a Roth IRA to consider this conversion.

Many financial firms are capitalizing on these new rule changes with heavy marketing, but like every important financial decisions, this decision needs to be made with extreme care and is best determined case-by-case. For an investor that already has a traditional IRA or retirement plan it is best to discuss with a financial professional whether converting to a Roth IRA is the right move before making any decisions.

Here is Fact 1 of 8 that can help you weigh your decision.

Fact 1. The income limitations for Roth IRA conversions has been removed under previous IRS laws.
Prior to 2010, households with modified adjusted gross incomes exceeding $100,000 were not eligible for Roth IRA conversions. While restrictions still exist for contributing to a Roth IRA, there is no longer an income limit for who can convert an existing traditional IRA or employer plan to a Roth IRA. The IRS’s removal of these income limitations has created a marketing opportunity for financial companies to promote and encourage investors to explore this option. As we mentioned earlier, this is a major financial decision and it is typically in your best interest to discuss your situation with someone who understands all of the moving parts involved.

Be sure to tune in to KQV 1410AM tomorrow, Wednesday December 4th, at 7:05pm EST to listen to one of the greatest civil rights leaders in our country speak about the marriage equality movement in our country and the situation for same-sex couples in our state.

Evan Wolfson, a Pittsburgh native, is a former Director of Lambda Legal, author, and founder of FreedomtoMarry.org.  He was also named one of Time magazine’s 100 Most Influential People Alive in 2004.  His contributions as a lawyer and a leader to the LGBT civil rights movement in our country is undeniable and inspiring.

If you can’t tune in, www.kqv.com will be streaming the show live on Wednesday night and re-airing it the following Sunday morning at 9:05.  Don’t miss this historic and important show!

Also, if you are a resident of Western PA and in a same-sex relationship, or you know someone who is, consider joining us for our free workshops starting at 9:30am on December 7th at the Wyndham Pittsburgh University Center.

You can read the full invitation here:  PA Same-Sex Couples Can Now Take Advantage of the Defeat of DOMA to Cut Taxes and Increase Wealth.

Rebecca Katz: Let’s take another question. This one is from Robert in Zanesfield, Ohio, who says, “For an upper-level tax bracket investor, when does it make sense to convert from a Roth to a regular IRA, and explain a ‘back-door’ IRA.” We’ve talked a little bit about the upper-level tax bracket issue, but what is a back-door IRA? Maria?

Maria Bruno: The back-door IRA is sometimes also likened to a contribute-and-convert strategy. In essence, for high-income earners who really make too much earned income to be able to contribute to a Roth IRA outright, there’s always the option to invest in a traditional IRA. Anyone can do that, as long as you have earned income of course. The question is whether the contribution would be deductible or not. With this back-door Roth feature, what you could do is contribute to a traditional IRA and then shortly thereafter convert it to a Roth. So it’s really a two-step process to get to a Roth, where you wouldn’t be able to do it directly because your earned income is too high.

So it’s a two-step strategy and there’s a couple of things to keep in mind. One is you want to do the conversion relatively quickly after the original contribution, so that the account doesn’t accumulate earnings, because if it does, then you might have a small tax burden there. So you want to consider that.

Also, if you have other IRAs that you’re not converting, traditional IRAs that you’re not converting, for the purpose of calculating the basis or any tax consequences—so you may not have consequences specifically on the back-door—but if you have other IRAs you’re not converting, the IRS requires you to aggregate all of those IRAs and potentially, you could be triggering some taxes. So the strategy works most seamlessly if someone does not have any other traditional IRAs they’re not converting.

Joel Dickson: What we have seen also is, investors will actually do conversions of traditional IRAs to make the back-door easier and to facilitate that in the future—again if it makes sense instead of—we always have to think about partial conversions or so forth. But there may be cases where it makes sense to convert all of the traditional IRA and now that back-door opportunity is available to you each year, if done for new money, without doing this.

Just so it’s clear, the reason that this back door is open, is that—as Maria mentioned—there are income limits on Roth IRA contributions directly. However, there are not any income limits on doing conversions. So you might have income that doesn’t qualify you for direct Roth contributions, but you can still do a conversion, and that’s where this “contribute to a non-deductible traditional IRA” comes in, and then convert it.

Maria Bruno: Right, so this really wasn’t a strategy prior to 2010, but now it is a strategy. We have information on vanguard.com if someone wants to go and take a look at that in terms of what the income limitations are and things like that, to help determine whether you can contribute outright or whether you need to do some type of back-door strategy.

Important information

All investing is subject to risk, including the possible loss of the money you invest.

For more information about Vanguard funds, visit vanguard.com or call 877-662-7447 to obtain a prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

Withdrawals from a Roth IRA are tax free if you are over age 59½ and have held the account for at least five years; withdrawals taken prior to age 59½ or five years may be subject to ordinary income tax or a 10% federal penalty tax, or both.

This webcast is for educational purposes only. We recommend that you consult a tax or financial advisor about your individual situation.

© 2013 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor.

Find out the IRS limits for 2013

The IRS has announced new contribution limits for retirement savings accounts, including increased contribution limits for 401(k), 403(b), and most 457 plans as well as higher income limits for IRA contribution deductibility. The new limits give you even more opportunity to save for retirement.

401k, 403(b), and most 457 plans

2012 2013
Age 49 and under $17,000 $17,500
Age 50 and older Additional $5,500 Additional $5,500

Roth and Traditional IRA contribution limits

2012 2013
Age 49 and under 100% of compensation, up to $5,000 100% of compensation, up to $5,500
Age 50 and older Additional $1,000 Additional $1,000

Traditional IRA modified adjusted gross income limit for partial deductibility

2012 2013
Single $58,000-$68,000 $59,000-$69,000
Married—Filing joint returns $92,000-$112,000 $95,000-$115,000
Married—Filing separately $0-$10,000 $0-$10,000
Non-active participant spouse $173,000-$183,000 $178,000-$188,000

Roth IRA modified adjusted gross income phase-out ranges*

2012 2013
Single $110,000 – $125,000 $112,000 – $127,000
Married—Filing joint returns $173,000 – $183,000 $178,000 – $188,000
Married—Filing separately $0-$10,000 $0-$10,000
* As of 2010, there is no income limit for taxpayers who wish to convert a traditional IRA to a Roth IRA.

Next Steps

If you are saving to the max in your workplace savings plan today, consider increasing your contribution in 2013 to the new plan limit of $17,500. If you are not saving to the maximum, consider increasing your contribution rate to help reach your retirement savings goals.

New contribution limits for retirement accounts

Find out the IRS limits for 2013

The IRS has announced new contribution limits for retirement savings accounts, including increased contribution limits for 401(k), 403(b), and most 457 plans as well as higher income limits for IRA contribution deductibility. The new limits give you even more opportunity to save for retirement.

401k, 403(b), and most 457 plans

2012 2013
Age 49 and under $17,000 $17,500
Age 50 and older Additional $5,500 Additional $5,500

Roth and Traditional IRA contribution limits

2012 2013
Age 49 and under 100% of compensation, up to $5,000 100% of compensation, up to $5,500
Age 50 and older Additional $1,000 Additional $1,000

Traditional IRA modified adjusted gross income limit for partial deductibility

2012 2013
Single $58,000-$68,000 $59,000-$69,000
Married—Filing joint returns $92,000-$112,000 $95,000-$115,000
Married—Filing separately $0-$10,000 $0-$10,000
Non-active participant spouse $173,000-$183,000 $178,000-$188,000

Roth IRA modified adjusted gross income phase-out ranges*

2012 2013
Single $110,000 – $125,000 $112,000 – $127,000
Married—Filing joint returns $173,000 – $183,000 $178,000 – $188,000
Married—Filing separately $0-$10,000 $0-$10,000
* As of 2010, there is no income limit for taxpayers who wish to convert a traditional IRA to a Roth IRA.

Next Steps

If you are saving to the max in your workplace savings plan today, consider increasing your contribution in 2013 to the new plan limit of $17,500. If you are not saving to the maximum, consider increasing your contribution rate to help reach your retirement savings goals.

Source: Fidelity