Small Business Finance Update: IRA Owners Now Have the Option to Convert a Traditional IRA to a Roth IRA

As many Americans are struggling to get hold of their finances and budgets, there's no better time to take advantage of money-saving opportunities that are newly available. Small business owners, especially, need to be sure that they are making the best financial decisions for themselves now that will have a positive impact on their retirement savings.

Small business owners in all industries are advised to have at least one IRA into which they can deposit funds for their retirement savings. Anyone - not just small business owners - can open a traditional or Roth IRA. However, business owners can also open one of two other types of IRAs: a SEP IRA or a Simple IRA.

With regards specifically to the traditional and Roth IRAs, there are some new options that have recently become available to help these IRA participants improve their financial situations. The most talked-about option is the new roll-over option for taxpayers earning $100,000 or more.

Tax Increase Prevention and Reconciliation Act of 2006

The Tax Increase Prevention and Reconciliation Act of 2006 was signed into place in order to help taxpayers get a few more tax advantages. Accordingly, the Act waives the $100,000 Adjusted Gross Income (AGI) limit for converting from a traditional IRA to a Roth IRA. Though the Act was passed in 2006, this particular adjustment did not become effective until January 1, 2010.

Thanks to the Tax Increase Prevention and Reconciliation Act of 2006, taxpayers who have traditional IRAs and assets held in other qualifying retirement plans can convert those retirement funds to a Roth IRA, even if their Adjusted Gross Income exceeds $100,000.

According to the Act, any conversions made in 2010 will have half of the taxable amount converted taxed in 2011, with the remaining half not taxed until 2012. Withdrawals from traditional IRAs are taxed, while withdrawals from Roth IRAs are tax-free.

Individuals who are considering converting their retirement plans to a Roth IRA should make sure that they have plenty of information about the differences between Roth IRAs and other retirement accounts. They should also be aware of the many strategies involved with careful retirement planning. It's important to speak with a financial advisor, accountant, or do a significant amount of research on your own to be sure that you are aware of all of the differences and requirements of IRAs. Here's a good place to start online research.

Specifically, individuals who are considering making changes to their retirement planning strategies should ask themselves how much they know about the following topics and how these issues could impact them:

• Protecting their retirement savings and financial security against higher future tax rates

• Potential tax breaks available when converting retirement plans to Roth IRAs if they have reduced asset values

• Using tax losses to negate (or offset) any conversion income

• Decreasing the amount of a taxable estate to decrease tax burdens, including tax-free distributions to beneficiaries

• Using Roth IRA savings to fund a trust

Many small business owners could improve their retirement savings and financial position if they take advantages of the newly enacted change to the conversion rule established by the Tax Increase Prevention and Reconciliation Act of 2006. Check with your financial advisor or accountant for more information about how they changes may impact you. As always, it's important to regularly review your retirement plan and financial situation to ensure that you are on the right path to achieving your financial goals.

Sources:

http://www.govtrack.us/congress/bill.xpd?bill=h109-4297

http://www.rothira.com/

http://www.goodfinancialcents.com/2010-traditional-ira-to-roth-ira-conversion-tax-rules/