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
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.
Mark F. Winn