Beginning in 2010, the Tax Increase Prevention and Reconciliation Act lifted
the restrictions on who can have a Roth IRA by allowing anyone, regardless
of their income or tax filing status to convert their Traditional IRA to a
Roth. Some articles and advisers are saying everyone with a Traditional IRA
should convert to a Roth. However, not everyone would benefit from a Roth
Conversion. For instance, if you are near retirement age, and plan to use
your Traditional IRA for income at retirement, you would not necessarily
want to pay all the taxes due upfront. Just take your funds as you need
them and pay the taxes in the year you withdraw the money from your
Traditional IRA, especially if you will be in the same tax bracket when you
take distributions. Wait as long as you can to pay the taxes, and pay them
in small increments as you use your money.
To determine whether you could benefit from a conversion, consider these
advantages of a Roth IRA over a Traditional IRA:
- No Required Minimum Distributions
- Tax-free income
- Ability to leave money tax-free to beneficiaries
Technically anyone is eligible for a Roth IRA beginning in 2010, however,
you will benefit most if you fit into one of the following categories:
- You do not want or need to take money from your IRA, including RMDs,
thereby allowing you to leave money tax-free to your heirs
- You have assets in another account to pay the taxes due upon conversion.
If you have to pay the taxes due from your IRA, converting is not usually a
good idea. Remember you can choose to pay all the taxes owed in one lump
sum in 2010 or you can spread the taxes out over equal payments in 2011 and
2012.
- You are a high net worth person who was not eligible to convert previously
Just because something is new and everyone is talking about it, does not
mean it is right for every individual. Consider all the pros and cons of
conversion before you make your decision.
