Roth IRA Conversion: Why Would I Want to Do That?!
3/17/2010
Roth IRA Conversion: Why Would I Want to Do That?!
For many taxpayers, the concept of a “Roth IRA” is nothing more than a faint murmur. You’ve heard the name, maybe even heard about how it lets you set aside money today that you will never have to pay tax on again, regardless of how much it grows between now and when you finally decide to spend it. Tax and financial advisors may have explained “It’s a great program for a lot of people, but you can pretty much forget about it. You make too darned much money.” Of course we know there’s no such thing as too much money, but Congress has determined they are not going to let individuals with gross income over $120,000 or married couples with more than $177,000 contribute to Roth IRA’s. Converting from a traditional IRA to a Roth IRA is another opportunity, but Congress denied that to taxpayer’s (individuals or couples) with gross income greater than $100,000 – until now that is.<?xml:namespace prefix = o />
Effective January 1, 2010 the income limit on Roth IRA conversions is eliminated. Now anyone can move investments from a traditional IRA to a Roth IRA and reap the significant benefits of a Roth, mainly:
--Tax free distributions as long as the Roth has been in place at least five years and the distributee is older than 59-1/2; and
--No required minimum distributions.
Of course, benefits like those don’t come without a cost. The value of the assets converted from the traditional to the Roth IRA must be included in taxable income in the year of transfer – ouch. Despite that up-front tax hit, conversion can result in substantial tax savings for many individuals over their lifetime. Converting when the value of investments is relatively low is one factor that might make conversion worthwhile. A related factor is anticipated growth in the account from conversion to distribution. Other factors include:
--Anticipated tax bracket after retirement;
--Years remaining to retirement; and
--Availability of money outside the IRA account to pay tax on the conversion value.
Another important factor is the one-time sweetener that Congress has created for conversions in 2010. Income tax payments due on 2010 conversions may be deferred into 2011 and 2012.
Of course, this is a complicated decision that should not be undertaken without the help of your tax advisor, financial advisor, or both. There are, however, other tools on this website to help with your decision. See more details about the Roth conversion process at Home>Resources>Tax Alerts. You can also access a Roth IRA conversion calculator from Resources>Financial Tools & Calculators>Retirement Calculators.