<p>[Why</a> It May Pay To Convert to a Roth IRA - WSJ.com](<a href=“http://online.wsj.com/article/SB10001424052748704201404574590302275262012.html]Why”>http://online.wsj.com/article/SB10001424052748704201404574590302275262012.html)
After reading the above article, I still can’t make up my mind whether it’s a good idea to do it or not. Anyone thinking of converting to Roth in 2010?</p>
<p>Saw that article this morning.
Both my H and I think it makes sense to wait until we’re 59 1/2 to convert to avoid the penalty. But it seems like a good idea at that point. Hopefully, we’ll be in a lower tax bracket too! I don’t like being forced to take out distributions at age 70 1/2.</p>
<p>DW and I have struggled with this question also. Whether or not it makes sense to convert seems to depend on factors specific to an individual’s situation. For example, it you’re sixty and want to use the IRA for estate planning only, conversion makes sense. On the other hand, if your non-Roth IRA has done exceptionally well and you’ll need all that money for retirement, conversion might not be a good idea. As the cliche goes … “It kinda depends …”</p>
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There is no penalty to convert from an IRA to a Roth at any age.</p>
<p>I think it makes a lot of sense to do it in 2010 if you can afford to pay the tax. The market is down right now and the tax rates are probably as low as they’re going to be for a long while. Convert now and pay the tax and the account will grow tax free forever.</p>
<p>^The penalty comes in if you have to use IRA funds to pay the taxes, thus an early withdrawal.</p>
<p>I’m assuming taxes will be higher when we are retired, so I am definitely converting to a Roth in 2010. The only question in my mind is whether to spread out the tax owed over 2011 and 2012, or just pay it in 2010, while tax rates are still lower. Since I will have 2 in college in 2011, the extra income in 2010 would hit on FAFSA. After that year, I will be back to one in college. </p>
<p>I would not do it if I had to take the money to pay the taxes out of the IRA. I just recently rolled my 401k from my former employer into an IRA in preparation to convert in 2010. I had a fairly large after-tax contribution in the 401k that I held out to pay the taxes.</p>
<p>[Retirement</a> Plans FAQs regarding IRAs](<a href=“http://www.irs.gov/retirement/article/0,,id=111413,00.html]Retirement”>http://www.irs.gov/retirement/article/0,,id=111413,00.html)</p>
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<p>There might be some tax. I wish there is an online calculator that also takes into account of pension and social security.</p>
<p>And more info here
[Roth</a> IRA 5 Year Rule](<a href=“http://www.money-zine.com/Financial-Planning/Retirement/Roth-IRA-5-Year-Rule/]Roth”>Roth IRA 5-Year Rule)</p>
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<p>One of the benefits of the Roth is that there are no required distributions, unlike the traditional IRA. We may never need to tap our Roths for distributions.</p>
<p>Keep in mind, when deciding to pay taxes now or 2011 and 2012, that the tax code is set to expire if nothing is done and taxes automatically go UP. The chance of nothing being done and taxes going up on the higher income brackets is a short odds situation.
Also keep in mind that if your converted Roth goes down prior to 10/15/2010 you can always take a mulligan and unwind it and do it over in order to pay less tax on the conversion. consult your investment adviser and tax adviser together.</p>
<p>The younger you are, the more advantageous it is to convert, as you get more years of untaxed growth in the converted Roth. Of course, tax rates will be lower in 2010 vs 2011+ for those in the 33% & 35% brackets. And also, who knows if the federal government decides to take away this privilege in future years trying to raise revenue.</p>
<p>I’d echo the statements above that if you can afford taking free non-IRA money today to pay for it, do it if you are young. Of course, that can be a tough thing taking money you can use today to aid an account you may not see for 20-40 years, especially at ages when most people are looking to build wealth or pay for things like private schools or colleges for kids.</p>
<p>That all said, a calculation I did using 7% growth assumptions, my state tax rates, and an assumption how the free non-IRA money used to pay the conversion taxes would have done yielded a whopping 35% difference.</p>
<p>TheresaCPA, my understanding is that you can only take the mulligan if you open a new Roth with the conversion funds. If you convert into an existing Roth, then you can’t reclassify it back to an IRA if you want to. For that reason, I intend to convert into a new Roth (with the intention of eventually merging the two accounts if possible to simplify record keeping and withdrawal tracking in the future).</p>
<p>Just as many financial advisers counsel diversification of investments in your retirement portfolio, some also counsel tax rate diversification by having a significant portion of your retirement assets in a Roth IRA, to guard against the risk (perhaps certainty) that your tax rates in the future will be higher than they are today. We’re thinking about it, for at least some of our retirement assets.</p>