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Road to retirement


Whether you're on the entry ramp or the leisure exit, these tips can ease your retirement journey.

Is a Roth conversion right for you?

Wish you'd opened a Roth instead of a traditional IRA? You might be able to get a do-over.

The only downside: You have to pay regular income tax now on any money you convert. But when you take out money at retirement, it will all be tax free. And, with a Roth, if you need to access your own contributions before retirement, you can do so without penalty.

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The choice is "whether you want to pay now or pay later," says Ed Slott, CPA, author of "Parlay Your IRA into a Family Fortune."

His pick: the Roth. "It takes the worry about future tax rates out of the equation," he says.

But before you decide, here are a couple of questions to ask yourself:

  • Is your income (single or married filing jointly) more than $100,000? If so, Roth conversion isn't an option.
  • Are you married filing separately? Again, if so, you can't convert.
  • Do you have the money handy to pay tax on the amount you convert? (Remember, you're paying it at your regular income tax rates.) If not, or if you have to take it from your IRA, conversion probably isn't a good option for you. "You don't want to dip into the IRA to pay the tax," says Slott. "That's not viable economically."

But for some IRA holders conversion is a good option. Best bet: talk to your tax pros to see if it's right for you.

If you find that you have a lot of deductions and not much income one year, that's a "perfect time to do a Roth conversion," says Peggy Kabaniss, CFP, chair of the National Association of Personal Finance Advisors. Not only do you get the benefit of conversion, but by forcibly increasing your income (money moved counts as income), you can take advantage of all the deductions coming your way.

"If you find yourself in a situation where income is lower and itemized deductions are higher, it's a great tax strategy," she says.

That's why it can sometimes be a good move for individuals or couples who've seen their income dip one year.

It also can be helpful, "with older people with really high medical expenses," says Kabaniss. "If you have someone who needs around the clock care, you can have home health care costs of $60,000 to $100,000, in which case you might actually need taxable income. Converting to a Roth is a great way to force taxable income."

Or if you're wealthy, and want to pass this account untouched to your heirs, converting it into a Roth can be a good strategy, says Barry Picker, CPA with Picker, Weinberg & Auerbach. Unlike a traditional IRA, a Roth doesn't force you to start taking money out at age 70 ½. And in some estate situations, converting to a Roth (and paying taxes now) can improve the tax picture for heirs, says Picker.

-- Posted: Jan. 3, 2006
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