Roth IRA: Convert It or Not?

By moneygodmother

Recent tax changes have several financial planners extolling the virtues of converting a traditional Individual Retirement Account (IRA) to a Roth IRA. It makes sense for some consumers, but not others.

This popular advice is due to two new rules beginning in 2010.

1)   The income limit for Roth conversions has been axed. So, higher income taxpayers who might be phased out of a Roth IRA can get one by converting.

2)   Retired savers who must take distributions can convert and spread taxes over 2010 and 2011.

What’s So Great About a Roth?

While you do not get a tax break for contributing to a Roth IRA, they do offer a few advantages that traditional IRAs do not.

• Earnings grow tax free.

• There is no minimum distribution age.

• Early withdrawals are penalty-free, if you follow certain rules.

It’s Not For Every Saver

Deciding to convert an existing IRA can be a tough choice, and a costly one. You must consider your age, income and 2010 tax rate. You will pay taxes on the amount converted, so it’s wise to ask:

1)   Will converting shift enough income to move you to the higher tax bracket?

2)   Do you have the cash to pay the tax?

3)   Do you need the money before 2015?

The bottom line? Get help to calculate whether converting is right for you—consult your tax advisor.