| The tax rules for 2010 allow anyone (even rich | | | | many years in the future. It also goes against |
| people) to roll over their IRA into a Roth IRA. The | | | | most traditional tax planning which says to always |
| wealthier you are and the more likely you are to | | | | defer paying taxes as long as possible. |
| leave your IRA assets to your children (and not | | | | Who should think about converting to Roth? Who |
| spend them in retirement) the more likely a Roth | | | | shouldn't? |
| IRA conversion is a good idea for you. It is very | | | | The most favorable situation to convert to Roth |
| likely that income tax rates in the US will be going | | | | is a wealthy person who expects their tax rate in |
| up significantly which is another reason to consider | | | | retirement to be higher than it is now, who will |
| converting to Roth in 2010. | | | | not be spending any of their IRA in retirement, |
| What are the significant differences between a | | | | who expects to live a long time, and plans on |
| traditional IRA and a Roth IRA? | | | | leaving the Roth IRA assets to the next |
| In a traditional IRA you get the tax deduction | | | | generation. The Roth does not have mandatory |
| (now) for contributed dollars, assets grow on a | | | | distributions beginning at age 70.5 like a traditional |
| tax-deferred basis, but you must pay taxes on | | | | IRA, so the Roth allows you to extend the |
| distributions from the IRA in retirement. With a | | | | tax-free life of your retirement assets. This can |
| Roth IRA you don't get a tax deduction for | | | | potentially result in a greater financial legacy for |
| contributed dollars (contributions are after-tax), | | | | your heirs. Some people may benefit by doing a |
| assets grow on a tax-free basis, and distributions | | | | partial Roth conversion in years when their income |
| in retirement (or after age 59.5) are income | | | | (and tax rate) is down temporarily for one reason |
| tax-free. You can make contributions to a Roth | | | | or another (recession, tax losses) to take |
| IRA after age 70 as long as you (or your spouse) | | | | advantage of their lower than usual tax rate. |
| have earned income. This is not allowed in a | | | | People who will not want to convert to a Roth |
| traditional IRA. Roth IRA owners are not required | | | | are those that cannot afford to pay the tax on |
| to take distributions, but traditional IRA owners | | | | conversion now, those who don't have enough |
| must take taxable distributions starting at age | | | | assets in a separate account (outside of their IRA |
| 70.5 (required minimum distributions). | | | | 401K's) to pay the taxes, and/or expect their tax |
| What are the special Roth conversion rules for | | | | rate in retirement to be substantially lower that it |
| 2010? | | | | is now. Older people who are planning on giving |
| Prior to 2010 Roth conversions were only allowed | | | | leaving their IRA assets to charity are usually |
| for people with modified adjusted gross income | | | | better off sticking with the traditional IRA. If you |
| of $100,000 or less. After January 1, 2010 this | | | | are nearing retirement and haven't saved enough, |
| option is open to everyone. Another positive | | | | you're likely best not converting. |
| change for 2010 conversions only is the option to | | | | Is a partial Roth IRA conversion the answer? Tax |
| delay recognizing (and paying taxes on) the | | | | rate diversification |
| income on conversion equally into 2011 and 2012. | | | | Most investors will likely do a partial conversion to |
| For example, if you converted $200,000 of IRA | | | | Roth rather than a 100% conversion. You could |
| assets to Roth in 2010 you have the option of | | | | also spread your Roth conversions over several |
| recognizing $100,000 of that income in 2011 and | | | | years to spread out the income (and tax) hits. It |
| the other $100,000 in 2012. After a conversion | | | | is probably smart to diversify your future tax |
| you must wait 5 years to withdraw the money | | | | rate bet by having some Roth IRA assets |
| from the Roth tax-free. | | | | (tax-free distributions) and some traditional IRA |
| Roth IRA conversion sounds good, where's the | | | | assets (taxable distributions). This will allow more |
| catch? | | | | creative tax planning in retirement in terms of |
| To convert to a Roth IRA you must recognize | | | | timing your withdrawals from different pools of |
| that amount as income and pay income tax on | | | | assets with different tax implications. Converting |
| that income. To convert $200,000 in IRA assets | | | | some of your IRA to Roth is a hedge against |
| to Roth you may have to write a check for | | | | future tax rate increases. |
| $80,000 (assuming a 40% marginal tax rate) to | | | | What are the risks of converting to Roth now? |
| pay the taxes on that conversion (either now or | | | | One risk is that you end up with a significantly |
| spread over 2011-2012 as discussed). In addition, | | | | lower tax rate in retirement than you thought |
| you should pay those income taxes from a | | | | (due to lower income or some other reason). |
| taxable account (not from your IRA or 401K). So | | | | There is always the risk that the US government |
| to convert you need to be willing to write a big | | | | will change the Roth rules in the middle of the |
| check now to pay the taxes for the conversion, | | | | game, and somehow limit the tax-free status of |
| and you should have enough money in a separate | | | | your Roth IRA assets. |
| taxable investment account to pay those taxes. | | | | This is complicated, get professional help! |
| Paying the tax on the conversion with IRA assets | | | | There are many significant factors with a Roth |
| themselves defeats the purpose of the | | | | conversion to consider, some of which we haven't |
| conversion, especially if you are under age 59.5 | | | | even mentioned (such as the alternative minimum |
| where you would be subject to a 10% penalty as | | | | tax). Each person's situation is different. Consult |
| well. It is tough for most people to voluntarily pay | | | | with your CPA and investment advisor to see if a |
| more taxes now than they have to, for a benefit | | | | Roth conversion is a good option for you. |