Is A Roth IRA Conversion Right For You?

In 2010, there will be no income limitation preventing a traditional IRA from being converted to a Roth IRA.  This will provide the wealthy with an opportunity to benefit from a Roth IRA.  So, is a Roth IRA conversion right for you?  Let’s look at advantages and disadvantages.  The benefits of such a conversion would be:

1.              Distributions will be tax-free if made after five years and
                 after age 59 ½ or death;

2.              Greater wealth can be accumulated in the tax-free environment                  the Roth IRA provides.  It is like paying income tax on the seed                  and getting the harvest income tax free;

3.              Unlike traditional IRA’s, owners of Roth IRA’s are not required to                  take out distributions during their lifetime which allows for                  greater accumulation of these resources;

4.              For those with federal estate tax exposure, converting from a                  traditional IRA to a Roth IRA can be a good way of reducing that                  estate tax exposure.  The payment of income taxes in year of                  conversion would reduce the size of the estate subject to the                  federal estate tax and would thus be a good way to minimize that                  exposure;

5.              Unlike traditional IRA’s, contributions to a Roth IRA can continue                  after age 70 ½.

The main drawback would be the acceleration of income into an earlier year.  You need to consider where you will pay the income taxes from.  it is best to pay the taxes from funds outside of the Roth IRA once converted.  However, the law permits income from 2010 Roth IRA conversions to be reported in 2011 and 2012, rather than in 2010.  So there are many variables to consider.  Each case is unique and professional guidance is always recommended.  


Contributed by

Mark F. Winn