Converting IRA assets to a Roth

Janine,
In a basic sense, it IS better to convert when your TIRA balance is relatively lower due to the market being down or your specific investments being down. That said, much of the advantage depends on what you are converting in kind vrs just moving money market funds over to the Roth.
1) If you are converting in kind, the best time is when you think the value of what you are converting is low and has good future prospects.
2) IF you are converting a cash equivalent, you are removing the advantage of converting an asset at a low value, but you can still use the cash in the Roth to purchase shares you expect to gain
3) Note that an in kind conversion really just saves the commission of selling and repurchase, which could be done as well.
4) Some people use a stategy of leveraging the look back feature of a recharacterization by using an aggressive investment in the Roth. If it produces good gains, your effective tax cost of the conversion (not the actual cost) is reduced because the gain in potentially tax free. If the investment disappoints, you can recharacterize to avoid paying taxes on phantom values. There can be a period of as long as 21 months between the conversion and recharacterization if the conversion is done in January. Of course a delayed recharacterization requires a tax extension or amended return.

With respect to the 2010 conversion, the main advantage is for those that don’t qualify now because their income is over 100,000 or they file married/separate. After 2009, these limitations are gone. In addition, for 2010 only the taxes for the conversion can be spread over the next two years with 50% in 2011 and 2012. However, this could turn out badly since the Bush tax cuts expire in 2010, and therefore rates could be higher in 2011 and 2012. Also, the recharacterization deadline remains the same, therefore some of the hind sight used in recharacterization decisions is lost. Note that you can opt to report the entire 2010 conversion in 2010 if you wish, and for those that are converting nominal amounts every year, this option would usually be best so you could use your 2010 bracket amount.

Re beneficiary designations, there are some complex situations that develop, but the main risk is not realizing yourself who is named on each account, AND the risk that the IRA custodian loses the info in the process of updating systems or changing clearing firms. This also happens when a custodian sets up new account numbers for a new investment advisory platform and transfers assets to the new number. Therefore, it is wise to confirm what shows on the custodian’s records. Many of them allow this to be done on line now. The other caveat is that there is no standard treatment in IRA agreements for default options. For example if there is no beneficiary, in some agreements the first option is the surviving spouse and in other it’s the estate.

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