Bill Raises Roth Conversion Limit But Leaves Out IOLI Penalty

Another provision in the final version of the tax-cut bill will let more taxpayers convert traditional individual retirement accounts to Roth IRAs, by removing the modified adjusted gross income limitations on rollovers from an IRA to a Roth IRA.

Under the provision, taxpayers can elect to pay tax on amounts converted in 2010 in equal installments in 2011 and 2012.

Such an expansion of Roth IRAs would reduce annuity sales to wealthier individuals who are currently not eligible for Roth IRAs, according to tax experts at Washington Analysis, a securities research firm that caters to buy-side clients such as pension and hedge funds.

Withdrawals from Roth IRAs after age 59.5 are not taxable, while withdrawals from annuities are taxed at the regular income tax rate.

According to Washington Analysis and American Council of Life Insurers’ tax experts, under current law, single taxpayers with annual incomes in excess of $110,000 and married filers with incomes of more than $160,000 are ineligible for using the Roth IRA.

Senate Finance Committee Chairman Charles Grassley, R-Iowa, has been holding off on completing the main tax-cut bill to preserve negotiating leverage on the companion tax-cut bill, which could contain a number of popular tax breaks.

The tax breaks include an education tuition tax deduction, a tax break for teachers who buy their own school supplies and a research and development tax credit for businesses. That measure also would preserve tax deductions for state and local sales taxes.

The thinking is that Republicans will seek to attach these provisions to a pension reform bill now being negotiated by House-Senate conferees.