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
- 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.
- 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.
- 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.
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?