Why We Converted Our Traditional IRA To A Roth IRA

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As you probably already know, 2010 is a great time to convert your Traditional IRA to a Roth IRA.  The year is now more than half over, so I thought I’d share my thoughts on the Roth IRA Conversion.

In 2010, you can convert a Traditional IRA to a Roth IRA even if you make over $100,000.  Also, you will pay taxes over a two year period and the first payment (1/2) isn’t due until April 2012 and the other half will be due by April 2013.  Here is a full list of 2010 Roth IRA conversion rules.

Even though I knew converting in 2010 would provide some distinct advantages, my wife and I decided to do it back in 2008.  Here’s why …

Why we Converted our Traditional IRA to a Roth

  1. Bookkeeping – Keep everything in one account – Basically, over several years we had been lazy and accumulated some 403bs here and some there.  My wife had a Roth IRA and 403bs through two different organizations.  We didn’t roll anything over when she left old employers.  We decided that everything was getting hard to track and properly diversify, so we wanted to roll everything into one account.
  2. Economic Meltdown – Since around 2007, I’d toyed with the idea of converting my Roth IRA.  By the middle of  2008 when our account values were cut almost in half, I decided that I would take advantage of the economic downturn and convert our traditional IRAs to a Roth.
  3. Anticipated income increase (also higher tax bracket) in the future – My wife is currently a stay at home mom.  However, since she has a Master’s Degree in Education, we anticipate that sometime she will go back to work.  Being in a lower tax bracket now made this a perfect time for us to convert to a Roth IRA.

Should You Convert To A Roth?

Because this is a very complex situation, you should ask your tax accountant to help you think through all of the various implications.  I’m not advocating that you go crazy with some type of Roth mania

The best piece of advice I’ve heard on the topic is to consider diversifying your investment vehicle – not just your investments.  In other words, have some money in a Traditional and some in a Roth.  This way you are in a position to financially benefit regardless of your tax bracket at retirement.

Since there are so many unknown retirement variables, you should think through this decision carefully.

Free Money Finance quoted the following from this piece from Kiplinger:

1. Can you afford to pay the tax on the conversion with money from outside your IRA?
2. Do you expect to be in a higher tax bracket in the future?
3. Will you need your IRA money in retirement, or do you think you’ll be able pass most of it on to your heirs?
4. How long do you plan to keep the money in the account?
5. Do you plan to pay college bills soon?

What if the government changes rules regarding the Roth IRA?

Well, that is bad new for me.  This is also one of my major concerns.

One of my regrets about converting is that the government has been known to do whatever it wants regardless of former laws.

Also, what if, despite all your best guesses, tax rates are lower in the future?  If you are diversified (some Roth IRA and some Traditional IRA) then you are in a position to benefit either way.  At least you are in a position where you won’t be financially hurt.

What if a Roth conversion isn’t right for you, but you still like the Roth IRA?

Perhaps you have run the numbers and converting your Roth is appealing, but you don’t have the money for the taxes.  In this case, you should simply start a Roth and contribute future retirement savings into that account.

Did anyone convert or plan to convert a Roth IRA this year?  What are your thoughts on it?


  1. JoeB says

    I definitely converted to a Roth this year and last year and the year before. I convert up to where the marginal federal tax rate changes from 15% to 25% and I have been doing this for several years and will be completely into Roths when I start collecting social security.

    One thing folks miss about regular IRAs is the double taxation of social security if you cash in regular IRA’s while collecting social security. The government will make sure you do so if you live to be 70 and still have regular IRA’s.

    There is a calculation that shows how much of your social security is subject to federal income tax. It is based upon both your social security income and your taxable income including work, interest, regular IRA’s, 401K, 457, 403b and the like. The point at which the taxable amount of social security starts kicking in is $32,000 a year. This could change, but I expect if it does, it won’t be in the right direction and will result in even more taxes on social security. What happens is that about 50% of my social security will be taxable when I start collecting at 66, but if I cash in regular IRA’s as well at that time, the amount ratchets up to 85% very quickly because of other income I receive. This results in an effective rate of 20 to 25% instead of the 15% I have been paying over the last several years. The calculations are complex and based upon each individual situation, so no specific scenario works for everybody. If you don’t have any income except social security, it probably won’t be a problem to cash in regular IRA’s as you need them. If you have other income, it can make a significant difference in the amount of tax you pay, particularly if you need to cash in a large amount from your regular IRA’s for an unexpected expense. Converting to a Roth over a period of years protects against this since withdrawing from a Roth has no tax consequences once you reach 59 1/2 and have had it for 5 years.

    I recommend every person investigate this, since it is not well covered in the media and is really a hidden tax on retired people with tax deferred retirement accounts. The Roth conversion is one of the only means for retirement tax planning that can be used before one retires. The idea of leaving a tax deferred account alone as long as possible is not always the best idea for every individual. and can in fact be a very expensive decision tax wise if you need a large amount in a single year, perhaps for medical expenses.

  2. says

    If I withdraw $150,000 from my IRA in New York state,(60 years old), do I have to pay faderel and state tax?If so, how much would the taxes be on income of approx. $120,000. Thank you

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