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Roth IRA Conversions

Beginning on January 1, 2010, anyone who has a Traditional IRA, SEP-IRA, or distributions from different type of employer retirement plans, will become eligible for a conversion to a Roth IRA.1 Previously, conversions have not been available to taxpayers with modified adjusted gross income (MAGI) above $100,000.

How Does a Roth IRA Conversion Work?

You can complete a conversion to a Roth IRA through a direct transfer or a rollover.

  • In a direct transfer, money moves between retirement plan trustees, and there is no withholding requirement.
  • In a rollover, you receive a distribution and must move it into a Roth IRA within 60 days. If the rollover is made from an employer retirement plan, 20% federal income tax withholding applies on the amount distributed.

Normally, you include the converted amount (less any after-tax contributions) in your taxable income for the year of the conversion. However, a special provision applies for conversions during 2010. Up to half of the converted amount may be deferred as taxable income in both 2011 and 2012. For instance, suppose you convert $60,000 from a Traditional IRA to a Roth IRA in 2010. You may include $30,000 in your taxable income in 2011 and the other $30,000 in 2012.

Why Convert?

Roth IRA conversions can be attractive for the following reasons:

Tax-free retirement income - Roth IRA earnings can compound on a tax-deferred basis, and withdrawals are income tax-free if they meet two conditions: First, the distribution must be made after the five-year period beginning with the first taxable year in which you set up a Roth IRA. Second, the distribution must either be: 1) taken after age 59½ ; 2) taken after your death or disability; or 3) used for qualified first-time home buyer expenses, up to a $10,000 lifetime limit.2

Tax simplicity for beneficiary - A Roth IRA can simplify income taxes for your beneficiary, too. Provided the five-year requirement is met, distributions paid to a beneficiary (after the owner's death) are income tax-free.

No required lifetime minimum distributions - Roth IRAs are not subject to IRS minimum distribution rules during the owner's lifetime.

Planning Considerations

Liquidity is important - When evaluating a conversion, consider whether you have enough personal liquidity to avoid withdrawals from a Roth IRA in the first five years. If you must make such withdrawals after converting, the earnings portion is taxable, and the full amount of the withdrawal may be subject to a 10% IRS penalty, unless an exception applies.3

Partial conversions may make sense - Converting a large amount in one year can push your total income into a higher federal tax bracket. To avoid this impact, consider making partial conversions spread over several years.

Sound Evaluation
A financial professional from HSBC Securities can help you assess conversion strategies and compare Roth IRA choices. We believe that this evaluation should be integrated into your retirement planning goals, while considering your need for liquidity, income, investment risk tolerance, and legacy planning. Our goal is to assist you in making a confident decision for your future. Prior to making any decision, please consult with your tax advisor.

For more information, speak to an HSBC Securities financial professional at your local branch or call 1 800 662-3343. Ask about our resources for evaluating Roth IRAs and conversion choices.

1. Conversions are allowed from SIMPLE IRAs at any time after two years of plan participation.
2. See IRS Publication 590, Individual Retirement Arrangements, for details.
3. Consult a personal tax advisor to learn about exceptions.

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All decisions regarding the tax implications of your investment(s) should be made in connection with your independent tax advisor.

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