What are some other considerations?
With the stock market decline over the last year, 2010 may be a good time to consider a Roth IRA conversion. By taking advantage of current depressed account values, the conversion tax will be less now than when the economic conditions improve and account values recover. Some other factors to consider are:
- When will the funds be needed to withdraw for retirement income? The more time you have, the more beneficial prepaying the taxes at conversion will be. This is because there will be more time to possibly grow and compound growth tax-free.
- Do you have sufficient funds from sources other than your IRA to pay the tax on converting to a Roth IRA?
- What is your expected income tax rate during retirement? If you expect rates to be lower in retirement, converting to a Roth IRA may not be advantageous. You would be paying higher taxes on the conversion now while later withdrawals from a Traditional IRA would be paid at lower tax rates. If you expect your income tax rate to be higher during retirement, converting to a Roth IRA makes more sense. In this case, the conversion taxes would be paid now at a lower rate while later withdrawals from a Traditional IRA would be paid at a higher rate.
- Is it important for you to leave a tax-free inheritance for your heirs?
- What if you later realize that, after a Roth IRA conversion, it was not such a great idea for your situation after all? The Roth IRA recharacterization rule allows you to reverse the conversion as if it never happened up to the extended due date (Oct. 15) following the year of conversion.
In any case, the decision to convert an existing Traditional IRA to a Roth IRA is unique for each individual. To find out if this might be good for you, contact your financial or tax adviser.
Donny Cole, CFP®, EA, is a financial planning analyst with Tegra Financial Partners, a subsidiary of Habif, Arogeti & Wynne, LLP. Reach him at [email protected] or (770) 353-5338.