When you hear the phrase “tax law changes,” you probably aren’t expecting good news.  However, if you’re considering a rollover IRA/Roth IRA conversion, these tax law changes may actually be to your advantage.

One of the biggest tax law changes in 2010, as far as traditional IRA/Roth IRA rollovers and conversions are concerned, is the ability to pay any Roth IRA tax incurred in 2010 during the conversion process in two parts.  To take advantage of this benefit, you report half of the amount converted during 2011 and pay taxes on it in that year, and then report the remaining half of the account balance during the 2012 tax year.  Spreading out the taxes over two years certainly helps to lessen the Roth IRA tax burden you’ll incur during the rollover/conversion process.

If for some reason the trustee of your current IRA is unable to perform a Roth IRA transfer, then the funds will have to be issued to you.  If this happens to you, understand that you have a limited amount of time to get that money into the target Roth IRA (typically 60 days, according to IRS statutes).  Fail to do so – even by one day – and the IRS will assume that you’ve simply withdrawn your money and will stick you with a variety of taxes and penalties.  For this reason, it’s a good idea to inquire about a direct rollover with both your current IRA trustee and your target Roth IRA trustee to make sure that this type of transaction can occur.

Here’s another tax consideration to make if you’re contemplating an IRA/Roth IRA conversion or rollover – where will you get the money to pay the taxes that are due?  Ideally, you’ll want to avoid using the money from your IRA to pay the taxes due, as this lessens the amount of money you have to invest.  Remember, you’re counting on these funds to grow over time to support you once you reach retirement age.

However, does it make sense for you to use money from your savings?  Will the money you lose in interest income by reducing the amount of your savings be offset by the gains of your money in the Roth IRA?  This is a question that deserves careful consideration.  Your tax accountant or financial adviser can help you put pencil to paper and come up with a real picture of just how much money is involved and how these decisions will impact your financial outlook, both in the short term and in the long term.

First, you cannot rollover funds from a Roth IRA into a traditionally structured IRA – you can only roll them over to another Roth IRA.  If you think about it, this makes logical sense – one of the reasons to have a traditionally structured IRA is to defer taxes on that portion of your income, a benefit you’ve lost already if the money is in a Roth IRA.  You can rollover funds from one Roth IRA to another Roth IRA if there is a compelling reason to do so, such as an opportunity to improve your investment portfolio’s management or returns.

You can also rollover funds from a traditionally structured IRA into a Roth IRA, but there will usually be taxes to be paid.  Legislative changes for the 2010 tax year are making it more advantageous to have a Roth IRA conversion account.  However, before you change the way your investments are structured, it’s a good idea to review your short and long term financial plans with a tax or financial adviser.  It may be beneficial for some individuals to pay those taxes upfront and convert money into a Roth IRA, but not for all.  Professional advice can help you to be certain where you stand before you initiate such a transaction.

One advantage of Roth IRAs is that having already paid taxes on the money you contributed, there are generally no taxes paid on withdrawals so long as they are considered qualified withdrawals or distributions.  To be considered a qualified withdrawal, you must have been participating in the Roth IRA for a minimum of five years and you must be at least 59 ½ years old.  However, if you’re buying your first home, become disabled, or are using your Roth IRA money to pay for higher education, then your distribution may be considered qualified without meeting those two criteria.  Withdrawals or distributions that are deemed not qualified may be termed early withdrawals, upon which the IRS imposes a 10 percent tax penalty.

One rule you should be aware of is that if you attempt to rollover your funds to a Roth IRA and are unsuccessful for some reason, you may also be subject to early withdrawal penalties.  Generally, speaking with the trustee or manager of the target Roth IRA will ensure that the Roth IRA is ready and able to accept any rollovers.  In fact, not having an account which is ready and able to receive funds is one of the most common Roth IRA rollover mistakes.

There is a wealth of information regarding Roth IRA tax rules located on the IRS website.  You may also be able to find IRS publications at your local post office or public library.  If you need help understanding the rules surrounding Roth IRA accounts and rollovers, talk with your tax adviser or financial planner.  When it comes to your future and your money, it’s a step well worth taking.