Pros & Cons of Roth Conversion

Tuesday, September 15, 2009

By Marvin Rotenberg, IRA Technical Expert

There has been a lot written about converting from a traditional IRA to a Roth IRA particularly in light of the law change taking effect on January 1st, 2010 which will permanently eliminate the conversion restrictions and allow everyone to convert. You have likely read about this in past articles at The Slott Report.

We thought we would provide some simple pros and cons for you to consider.

Reasons to consider conversions:

  • Your income tax bracket may be the same or higher in retirement.
  • You have special favorable tax attributes in the year of the conversion. Attributes include: large charitable deductions, carry forward losses, and investment tax credits. If you have the ability to report lower income in any given year converting in that year could lower your income tax on the conversion.
  • Suspension of the minimum distribution rules at age 70 1/2 for those individuals not needing IRA funds to live on.
  • Ability to make contributions even after age 70 1/2 (if there is eligible earned compensation).
  • Provide an income-tax-free inheritance to heirs.

Reasons NOT to consider conversions:

  • If there is going to be an immediate need for the money.
  • Your income tax bracket will be much lower in retirement.
  • Having an aversion to paying the income tax up front and not trusting the government to keep the tax-free deal.
  • There is no liquidity to pay the tax due on the conversion from non-retirement assets.
  • If charity is the ultimate beneficiary, they will not have to pay income taxes on the money they receive, so why should you?
 

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