Converting a traditional IRA (or qualified plan funds) to a Roth IRA can present an attractive option. Until 2010 the eligibility limit of $100,000 of adjusted gross income has precluded many taxpayers from this alternative. After 2009, the income eligibility limit is repealed.

Converting a traditional IRA to a Roth IRA requires the taxpayer to pay income taxes on the amount converted. Treating this as an advantage seems counter-intuitive since many taxpayers have contributed to IRAs so as to defer the tax until IRA distributions are received. Here are some of the benefits from converting a traditional IRA to a Roth IRA:

1. All future income taxes on Roth IRA distributions, including all future growth within the account, are waived. Currently depressed IRA values may enhance this benefit. By prepaying the tax, no future income tax will be due when qualified distributions are made from the Roth IRA.
2. No minimum distributions are required to the taxpayer or a beneficiary spouse, or to a spouse who rolls the Roth IRA into his or her own IRA. The full Roth IRA can accumulate tax-free for a longer time while avoiding distributions which are not currently needed.
3. Distribution to non-spouse beneficiaries will also be tax free, but these beneficiaries must take required minimum distributions. The distribution can be stretched out over their lifetime as calculated under IRS tables. This presents the opportunity for a long-term stream of tax free income.
4. The income tax which results from the conversation to a Roth IRA should be paid from other assets of the taxpayer. Otherwise the benefit of the conversion is diluted. These payments like any other lifetime expenditures will result in a reduction in the taxpayer's estate for New Jersey and federal estate tax purposes. The Roth IRA will be part of the taxable estate.
5. For conversions made in 2010, there is a one time option of deferring the income tax so that 50% of the taxable income is included as income in 2011 and the other 50% is included as income in 2012. Before electing this deferral, taxpayers should consider whether tax rates are slated to increase and what their other income will be in these years.

Conclusion. Converting a traditional IRA or qualified plan funds to a Roth IRA combined with naming younger family members as ultimate beneficiaries can produce a long-term stream of tax free payments. The income tax is prepaid up front on the amount converted. Future qualified distributions of the converted amount and the capital growth on that amount are free of income tax. Of course, an offset is that the tax is paid sooner and the future earnings on that amount are lost.