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Taxpayers with an adjusted gross income over $100,000 can now roll over a traditional IRA or an eligible retirement plan distribution to a Roth IRA.

Under the new rules, which became effective January 1, 2010, the former income and filing status limitations on these rollovers are eliminated and any taxpayer can roll over a traditional IRA (including SEP or SIMPLE IRAs) or eligible rollover distribution from a retirement plan and, for 2010 rollovers only, take advantage of a special rule for reporting the taxable portion of a rollover in gross income.

Under the special reporting rule, if you roll over a traditional IRA or eligible retirement plan distribution to a Roth IRA in 2010, you have the option of (1) reporting 100 percent of the taxable portion of the rollover as income in 2010 or (2) reporting half of the taxable portion of the rollover as income in 2011 and half in 2012. For rollovers after 2010, this amount must be reported as income in the year of the rollover. A rollover to a Roth IRA from a traditional IRA or eligible retirement plan distribution is exempt from the 10 percent penalty for premature distributions from traditional IRAs or retirement plans. However, under the general rules for Roth IRAs and designated Roth accounts, in order to take advantage of the tax benefits, the rollover amount cannot be distributed from the Roth IRA for a period of five tax years from the date of the rollover or before age 59½.

At this time, rollovers of retirement plan accounts are only available for eligible rollover distributions or designated Roth accounts. If you are an active employee or participant in a retirement plan and are not eligible to receive a distribution, you cannot roll over to a Roth IRA. However, there is growing pressure on Congress to relax the rule to permit an active participant to convert a retirement plan account to a designated Roth account without taking a distribution from the plan. DLA Piper is watching this development and will alert you if this rule is relaxed.

In considering a rollover to a Roth IRA, you need to consider a number of factors, including your current income tax bracket, your expected income tax bracket when you access the funds, how many years you have until retirement and how likely it is that you’ll need to access the funds earlier. Before you make any decision, you should fully understand the rules governing Roth IRAs and the rollovers.