Whether to convert to a Roth IRA is not a simple decision


Thanks to the Tax Increase Prevention and Reconciliation Act, regardless of one's filing status or how much one earns, nearly each of us will be able to convert our traditional individual retirement accounts (IRAs) into a Roth IRA -- for 2010 only. For many, the conversion debate is creating more questions than answers as retiring minds simply want to know: Is this a smart move for me? There's no simple answer.

As of Jan. 1, the income restrictions that had prevented Roth IRA conversions by taxpayers with adjusted gross income over $100,000 or by married individuals filing a separate return will be removed. Virtually all investors will have access to a previously unavailable tax-planning opportunity.

This is a radical departure from when specific requirements had to be met to have a Roth IRA conversion with the blessing of the Internal Revenue Service. It is now being seen as a timely opportunity to move money into a Roth IRA and have tax-free withdrawals at retirement.

But before rushing to the conversion altar, it's recommended to do some financial soul searching.

A key question to ask yourself is, upon retirement do you expect to be in a higher or lower tax bracket? This can be difficult to answer. If you expect to be in a lower tax bracket at retirement, then the traditional IRA may be the way to go. This is the regular IRA wisdom, and it still holds true for many pre-retirees. If you've already got a traditional IRA there may be no good reason to change.

While the Roth IRA may prove helpful for those expecting to be in a higher tax bracket, it would be dangerous, from a financial-planning perspective, to take a definitive stance at an early stage. The point to emphasize is that this is a highly variable issue, and the answer will only be determined after carefully analyzing each individual situation and considering possible future scenarios. While it's likely that many of us will be in lower tax brackets during retirement, it's also likely many of us will remain in a higher one.

While no one can predict what will happen with taxes, it's probably safe to assume they will increase. As future rates could be much higher even for those in retirement -- as the retirees may be one of the wealthiest classes -- converting traditional IRAs to Roths may make sense in the face of a revenue-seeking government.

With these brief points in mind, Roth conversion certainly needs thinking over. Consult with your tax and financial advisers before going ahead. You may find you're better off right where you are -- in the traditional IRA or 401(k) plan.

Paul Strebel is a certified financial planner in Ithaca and business lecturer in the School of Hotel Administration.


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