Q. I have two questions:
First, we are in the process of closing on the sale of our house in Philadelphia, we are lucky to make a small profit in the sale. We are looking at renting for a few months in Charlotte to find our new house. What is the best way to "save" our money in the mean time, to get some return but have the flexibility to use it within 1 month or 6 months if needed?
Second, I am self employed and my gross income is approx $200k. I read that in 2010 I can convert a traditional IRA into a Roth IRA. Right now I do not qualify for a Roth IRA, so I am looking at putting $5000 in a traditional IRA for me and $5000 for my wife as well, for 2008 and 2009. In 2010 I would like to convert this into the Roth IRA, is this possible without penalties? Thanks --Peter, PA
A. Peter, any money needed in the next month to a few years should be kept in liquid, FDIC-insured, bank savings or money market accounts. You won't get a lot of return but you need liquidity and safety more.
Today, you have to pass an income test before you can convert a traditional IRA to a Roth. Since your modified adjusted gross income (MAGI) is more than $100,000, you can’t do it. In 2010 however, it’s a whole different story – there is NO income test. Anyone with any MAGI can make the conversion in 2010. The upside to the conversion: tax-free growth of these assets, tax-free withdrawals of these assets someday (assuming you are 59½ or older and the Roth IRA is more than 5 years old), no minimum distribution requirements once you turn 70½ and an eventual reduction in your taxable estate.
Of course, you will pay taxes on a Roth IRA conversion. But if you do this in 2010, you don’t have to pay them right away. Unless you elect otherwise, the taxes on the conversion will be spread out over the 2011 and 2012 tax years. In effect, this gives you the ability to delay full payment of any tax due until April 2013.
Whether you do or don’t convert a traditional IRA into a Roth in 2010, you will want to know about the changes in tax law affecting IRAs and other retirement savings vehicles, and your estate and your investments. Before you make a move with your IRA, talk to a qualified tax professional who understands the coming rule modifications. Congrats on making a profit on your home sale and enjoy the south!
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