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LLOYD: Roth IRAs: Should you convert to them or not?

Did you receive that special Christmas gift you desired? Uncle Sam has a gift for you this year. You heard it right, Uncle Sam.

In 2010, new tax rules will allow more people access to a Roth Individual Retirement Account.

The Roth IRA has been only a dream for individuals with adjusted gross income of $120,000 or more and for married couples with an annual adjusted gross income of $176,000. And if that's not complicated enough, individuals with a modified adjusted gross income of more than $100,000 and married taxpayers who file separate returns were barred from moving assets held in traditional IRAs into a Roth IRA.

However, beginning Jan. 1, the government will permanently eliminate both the income and filing status restrictions on converting your traditional IRA to a Roth IRA, which will allow the future growth of your retirement account to be tax free. Yes, tax free. This is music to my ears since I am a firm believer with runaway government spending, taxes will eventually be raised not just for the wealthy, but for everyone.

That is why it is important to look at this new available option closely. It is also necessary to be prepared with knowledge: I am certain in the coming months you will hear Wall Street brokerage firms and both large and small banks advertising this new option to capture your business.

However, this Roth IRA conversion option may not necessarily be the best decision for everyone. As a first step, talk to your CPA or advisor to see what impact this conversion would have on your 2010 income taxes. You will receive a 1099 form from the company where your IRA is located showing the conversion as taxable income. As a result, the conversion may raise your taxes to a higher bracket.

However, the IRS will allow you to spread the tax liability over your 2011 and 2012 returns. The gamble is this: if tax rates increase, you may pay higher taxes in those later years.

As scary as that may sound, the benefits of deciding to convert may outweigh the potential tax implications, including:

* Tax-free income later in life: This is especially valuable during the retirement years.

With the uncertainty of Social Security being available for baby boomers and with pension plans being eliminated by many companies, tax-free income could be a smart option -- depending on your future financial situation.

* Income tax-free at death: A traditional IRA is taxable to your children or other family members except for spousal rollovers. A Roth IRA is tax-free at death.

* No mandatory minimum distributions: Required minimum distributions, known as RMDs, are not required with a Roth IRA at age 701/2. Traditional IRAs require this distribution whether you need it for living expenses or not.

* Future gains: Taking advantage of this option while stock prices are down, so that future gains in the market become tax-free.

As with any retirement plan, there are still rules that the IRS will make you follow to convert your traditional IRA to a Roth IRA. What's most important is obtaining information and trusted advice, so you can make the decision that is best for you.

Creating a smart tax planning strategy -- which could include this new conversion option in 2010 -- is truly a gift of a lifetime.

Mark Lloyd is the founder of The Lloyd Group Inc., which serves the distinctive financial needs of those nearing retirement and those already retired. He hosts a weekly radio show called "Focus On Retirement" that can be heard in Gainesville on 103.7-FM WXKT Saturdays at 9:30 a.m. and Sundays at 7:30 a.m. His Web site is www.thelloydgroupinc.com.