To Roth or Not to Roth

     Effective January 1, 2010, the limitation on Roth IRA conversions is lifted. In the past, you could only convert your IRA to a Roth IRA if you had less than $100,000 of “modified adjusted gross income.”

     Over the past several years, many individuals have contributed to either deductible or nondeductible IRA accounts. Many other individuals have rolled over pension and/or 401(k) plan assets into “rollover” IRAs. All of these accounts have been good ways save for the future as the earnings in these accounts are tax-deferred until you withdraw them, and the assets in the accounts are generally protected from creditors. The accounts grow until you are required to begin withdrawals at age 70½. Roth IRAs, however, are better. The earnings on Roth IRAs are tax-free when you withdraw them, are protected from creditors and do not require you to begin withdrawals at age 70½.

     So, what’s the bottom line? Effective January 1, 2010, you can convert one or more of your current IRA accounts to Roth IRAs. If you convert, you would pay tax early (usually not a great idea), but all earnings after that date would be income-tax-free forever (a pretty neat concept).

Who should convert?

• People who do not need to touch their IRAs for at least 10–15 years. The longer the better to give the account plenty of time to grow tax-free.
  
• People who want to leave their Roth IRAs to their kids and grandkids

     Why is conversion worth considering? Only the difference between the fair market value of the account on the date of conversion to a Roth IRA and the total of your nondeductible contributions would be taxable. Given the equity markets over the last couple of years, the value of your accounts might have fallen. If so, the poor market could end up creating an opportunity to avoid tax on all the growth in the account after you convert.

Who should not convert?

• People who expect to use their IRAs to supplement their retirement income. If you plan on spending your IRA during your lifetime, don’t convert it now.
• People who cannot afford to pay the taxes on the IRA without dipping into their IRA account

     There is no rush at this point. The election cannot be made until the first business day of 2010 (January 4, 2010). At this point, I just wanted to plant the seed for a more in-depth discussion toward year-end.