Take tax control of your IRA conversion
Rucci, it's a different story for someone half that age. "If you're 30, it
might make sense when you consider the growth you'll get with contributions in
But each person's situation is different, and an
older person might find conversion a valuable strategy.
Take, for example, a person with a large traditional
IRA, who is approaching 70½, the age at which he has to begin
minimum distributions, or RMDs, from the account. Such mandatory
withdrawals are not part of a Roth plan.
"For retirees in a distributions situation, it's
a great way to lower your IRA a little bit so that you don't have
to take large RMDs," says Bogue, who also writes a financial
column for MaineToday.com.
The retiree will then get to
leave money in the Roth longer, producing more earnings that will be tax-free
when he ultimately does take them out on his timetable, not the IRS's required
"There's nothing to prohibit you from converting
when it fits your financial and tax situation," says Bogue.
"Doing a partial conversion may let you take advantage of 401(k) Roth
advantages, but it won't kill you on taxes."
window opens in 2010
If you're willing to wait a few years, you can
get a little IRA conversion help from Uncle Sam.
The Tax Increase Prevention and Reconciliation Act,
or TIPRA, that became law in May 2006 will allow all taxpayers,
even those making more than $100,000, to convert their traditional
IRAs to Roth accounts as long as they do so in 2010 or later.
As an added incentive, the law also offers you the
chance to spread out any conversion taxes you owe over the next
two years. So if you convert in 2010 and owe $50,000 in taxes for
doing so, you can pay $25,000 when you file your return in 2011
and $25,000 with your 2012 filing.
The new rules only apply to
conversions made in 2010. And the removal of the earnings limit is for conversions
only. The existing income ceilings on opening or contributing to a Roth IRA remain.
While removal of the conversion earnings limit no
doubt will please many making six-figure-plus incomes, the basic
considerations remain: Will converting provide you with more, not
just tax-free, money in retirement? And can you pay the taxes from
another source so that you don't eat into your IRA savings to pay
converting to a Roth IRA makes sense when you expect your tax rate to stay the
same or to go up in retirement. If you expect your tax rate to fall in retirement,
then you need to run the numbers carefully to see if converting now makes tax
and financial sense.
Bogue is an ardent supporter of Roth accounts and conversion
to them when appropriate.
"Generally, I'm a believer in at least considering
conversion, not just blowing it off," says Bogue. "You're
taking the tax man right out of the picture in the long run when
you do this. Consider the 401(k) conversion taxes as an extra contribution
to your retirement 401(k) savings and you don't have to worry about it
about a conversion, however, also depends on your confidence as a tax bracket
Do you think you'll be making less in retirement?
If so, you might want to hold off on converting since, if your prediction comes
true, your IRS bills on retirement distributions should be lower than what you
now pay. Just make sure you're figuring in all potential retirement income.
"A lot of people who've been saving through a 401(k) are going to get taxed on it and (in retirement)
they will be right where they were (as far as taxes) when they were
working," says Bogue.
And what if lawmakers
decide to start increasing tax rates?
Both Rucci and Bogue
agree that, given the large federal deficit, don't expect current tax rates to remain
this low indefinitely.
"A lot of people are saying they're
going to make a Roth contribution since tax rates are very low now," says
Rucci. If you agree with that premise, paying the tax today and getting the leverage
of growing your money tax-free is an alluring thought.
are they're going to be raising taxes," says Rucci. "No one has a crystal
ball, but it gives you some indication of what you should consider."
|-- Updated: March 10, 2008