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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?
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There are also some factors that might make you shy away from a conversion.

"I, myself, would not do a conversion if it was going to be taxed at any kind of high tax bracket," says Kabaniss. "Why would somebody in a 30 percent tax bracket purposely incur taxable income?"

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And think about what you eventually want to do with the IRA. "If you are going to leave your IRA to charity anyway, then there's really no advantage to rolling it into a Roth," says Picker. "A charity is tax-free, so why should you pay taxes on it now?"

You also want to ask your tax professional if there are any state regulations that impact you if you have a Roth, rather than a traditional IRA when you hit retirement. In New York, for instance, only the annual distribution counts as income if you're trying to qualify for Medicaid, says Picker. But if you have a Roth, then the entire account balance is counted.

If you want to convert your IRA, you also need to have a little cash handy.

"Don't go broke to convert," says Slott. You don't want to put another mortgage on the house or cramp your lifestyle just to convert your IRA.

Partial conversion
If you think the move makes sense, and you don't have a ton of money, consider a partial conversion. "You can do it a little at a time," Slott says.

Convert just a portion of the account. As long as you meet the income and filing requirements, you can continue to convert a portion (or not) every year.

When you convert money from your traditional IRA to a Roth, it counts as income. If the total of your IRA account would increase your earnings enough to kick you into a higher tax bracket, a partial conversion could be just the ticket.

What if you complete your taxes and discover that you were closer to the next bracket than you thought and your conversion kicked you over? You are entitled to yet another do-over (officially known as "recharacterization"), where you can convert the money back into a traditional IRA account. And for tax purposes, it's as if it never left the traditional account in the first place.

When in doubt, "I would say convert more," says Slott. "A Roth conversion is one of the rare second chances you get in the tax code."

And, in the meantime, if the value of your investment skyrockets, you really win. You only pay tax on the money you converted, leaving your new gains tax-free. "It's like getting a bet in on a horse after the race is over," says Slott. "It's a tremendous opportunity."

Dana Dratch is a freelance writer based in Atlanta.

-- Posted: Jan. 3, 2006
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