Should You Convert To A Roth IRA?


If your income is $100,000 or less and you are single or married, filing jointly, you may be eligible to convert your traditional IRAs to a Roth IRA in order to take advantage of federally tax-free earnings in the future.  You will generally pay ordinary federal income tax (but not the 10% penalty tax) on the taxable amount that is converted. Your tax-free potential is maximized if you pay the taxes from your current income or personal savings, not your IRA.

Beginning in 2010 the $100,000 adjusted gross income limit for conversions to Roth IRAs is permanently repealed. From 2010 onward, all taxpayers, regardless of income, can convert to Roth IRAs.

There are five primary reasons why you may want to consider a Roth Conversion:

  1. Ability for tax-free compounding post 701/2 WITHOUT minimum distributions
  2. After death tax-free growth - provides excellent estate benefits
  3. Gross-up of IRA by paying conversion tax from other assets
  4. Prepayment of federal income tax temporarily lowers federal estate tax
  5. Tax free compounding and growth

There are a number of financial advisors promoting ROTH IRA Conversions due to in part to current market conditions as well as an increase in employment terminations (layoffs).   There are number of reasons to consider a conversion -- however, before taking a distribution or conversions you may want to consult with your tax advisor to understand what the potential tax consequences. 

Jeff Barth is a Certified Public Accountant in Westlake. He may be reached at: 

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Volume 1, Issue 1, Posted 9:43 AM, 11.10.2008