By David S. Foster
Thelen Reid Brown Raysman & Steiner LLP

The Tax Increase Prevention and Reconciliation Act of 2005, signed by President Bush on May 17, 2006, allows taxpayers to convert regular IRA balances to Roth IRAs without regard to income limits beginning in 2010. Moreover, the income created by a 2010 conversion can be taxed in equal installments in 2011 and 2012. Many high income taxpayers may want to take action now to maximize the tax benefit.

Regular IRAs v. Roth IRAs. Contributions to regular IRAs generally are deductible; income accrues tax-free; and withdrawals are fully taxable. Contributions to Roth IRAs are not tax-deductible; income accrues tax-free; and qualifying withdrawals are exempt from tax.

At age 70½, no further contributions may be made, and withdrawals must begin from regular IRAs. Contributions may be made to Roth IRAs at any age, and no withdrawals are required before death. Roth IRAs save on estate taxes because the income tax has been prepaid.

Under current law:

		Taxpayers may make tax-deductible contributions to a traditional IRA unless they or their spouse are eligible for an employer-sponsored retirement plan and their incomes exceed certain thresholds.
		High-income taxpayers who are not eligible to make deductible contributions may make nondeductible contributions to traditional IRAs.
		Taxpayers may make contributions to Roth IRAs if their incomes are below somewhat higher thresholds without regard to participation in employer-sponsored retirement plans.
		Taxpayers with adjusted gross incomes under $100,000 may convert balances in traditional IRAs into Roth IRAs. These conversions are subject to income tax, but future income may be tax-free.

What the Act Does. Beginning in 2010, the Act allows high-income taxpayers to take advantage of Roth IRAs by converting regular IRAs into Roth IRAs. The Act also, in effect, allows Roth IRA contributions without regard to income limits. High income taxpayers can contribute to a nondeductible regular IRA each year and then immediately convert it to a Roth IRA.

What To Do Now. Although high-income taxpayers cannot convert regular IRAs to Roth IRAs until 2010, no conversion can take place unless the taxpayer has an IRA. High-income taxpayers might consider building up regular IRAs by:

		Making non-deductible contributions to IRAs each year beginning now; and.
		When switching jobs, moving their 401(k) account balances to IRAs instead of their new employer's plan.

Moreover, high-income taxpayers who participate in 401(k) plans that allow in-service withdrawals (from rollover accounts or because the taxpayer has attained age 59½) may want to roll their 401(k) balances into traditional IRAs in preparation for conversion.

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For more information about the issues covered in this report, please contact David S. Foster in our San Francisco office at 415-369-7020 or at dsfoster@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.





©2006 Thelen Reid Brown Raysman & Steiner LLP