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Roth IRA To Convert or Not to Convert
NEW YORK (1/25/10)--As of Jan. 1, you have an opportunity to shelter retirement savings from future tax increases. That’s because, as of that date, the usual income limit of $100,000 is lifted. In addition, tax rules let you spread the conversion taxes you’ll owe over two years instead of paying them all at once (Pittsburgh Post Gazette Jan. 13). Those are good reasons to convert your regular Individual Retirement Account (IRA) to a Roth this year, but it might not be the best move for you. Look at the pros and cons. Convert--If you’re young, converting to a Roth is a smart money move. You’ll pay ordinary income taxes at your current tax rate on the money you convert, but consider this:
* A Roth IRA allows tax-free growth and tax-free income distributions at age 59½ or older as long as you have held your Roth account for five years or more. The younger you are, the more time you have to grow your retirement savings tax-free. * The market’s been down and is climbing only fitfully. Most likely your account value is at a low. By converting now, you may pay lower taxes than if you wait. * With looming federal budget deficits, Medicare, and Social Security obligations, there’s a good chance tax rates will increase in the coming years. You’ll be better off paying those taxes now than later. * By converting to a Roth, you avoid the traditional IRA requirement to take yearly minimum distributions starting at age 70 ½. This can leave more for your heirs if you don’t use the money yourself.
If you’re older, a Roth still may make sense:
* A traditional IRA requires you to withdraw starting at age 70 ½, but a Roth doesn’t. The longer you can wait, the more time your money has to accumulate tax-free. * Under current tax laws, converting a traditional IRA to a Roth can reduce the size of your taxable estate. Think: decades of tax-free growth. * If you name your spouse as your Roth beneficiary, and your spouse forgoes withdrawals after you die, those Roth IRA assets keep compounding untaxed for the rest of your spouse’s lifetime. If your spouse names a child as beneficiary, the tax-free compounding goes on.
Maybe not--Young, old, or in between, there are reasons to think twice about converting:
* You will owe taxes now. Do you have enough in savings to cover the tax bill? If not, don’t convert and pay the taxes out of your current IRA. The amount you take out to cover the taxes will lose the chance for tax-free compounding--forever. In addition, if you’re younger than age 59½, you’ll have to pay a penalty to take the money out of your IRA. * If you’re certain your tax bracket will fall in the next few years, it won’t benefit you to convert now. Reconsider converting when your tax bracket falls.
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