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Acting rationally in the face of an unsteady economy and dysfunctional government


Since the early 1980s, Americans have been using tax deferred pension and IRA accounts as the principal
vehicles for retirement savings. This asset accumulation was supported by direct contributions to IRA accounts
and tax free rollovers from employer pension plans.

Most IRA accounts were funded with deductible contributions, giving the accounts a zero-tax basis. This means
that all distributions are taxable income. These accounts are pretax assets. The primary exception occurs when
non-deductible contributions are made to IRAs. Tax basis usually amounts to a small percentage of fair market

In 1998 the Roth IRA was created. It is an account where future distributions are exempt from taxation. These
accounts had to be funded with nondeductible contributions.

Congress also allowed for taxable transfers from regular IRA accounts to Roth accounts as long as a taxpayer’s
Adjusted Gross Income is below $100,000. These taxable transfers are essentially after tax contributions.
Effective for 2010, the income limit on Roth conversions was eliminated.

If Roth conversions are made in 2010, the income is recognized ratably in 2011 and 2012 unless the taxpayer
elects to recognize the income in 2010.