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Columns: Tax Talk
George Saenz, CPA   Expert: George Saenz, CPA
Tax Talk
Why pay taxes today if you can pay them tomorrow?
Tax Talk

Converting to a Roth IRA better in 2010
 

Dear Tax Talk,
Upon retirement, I will be moving my 401(k) to a self-directed IRA. However, my goal is to move the entire sum to a Roth IRA to get the government out of my retirement funds as quickly as possible. What is the best way to accomplish this with the least tax consequence?
-- Jim

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Dear Jim,
Whether you are in a traditional IRA or a Roth, the government is still involved. All IRAs need account custodians. The custodian is the institution that reports the IRA to the IRS for regulatory purposes. A traditional custodian, such as a bank or brokerage house, will only allow the owner to invest in certain assets -- usually highly liquid and regularly traded investments.

A self-directed IRA allows the owner to have more discretion in investments. In a self-directed IRA, you can invest in real estate or private placements. You still can't invest in antique cars, artwork or fine wines because the government doesn't want you to drive, display or drink your account balance.

The major difference between a traditional IRA and a Roth is the taxation on the distribution. A Roth IRA is tax-free on the distribution, whereas the traditional IRA distribution is taxable. To get to a Roth, you have to pay the tax upfront on the original investment in the Roth. I am of the opinion that deferring taxation is the best strategy.

The government is not really "in your IRA" until you distribute, and then it is really on the outside of the IRA getting its tax money from distributed funds. Therefore, I'm not sure what you want to accomplish by this strategy other than paying taxes today.

If you think you are in a position to capitalize on a good investment and you want that to grow tax-free, then maybe you should only convert so much of the rollover to a Roth that allows you to make that investment. One last thing to consider: Interestingly enough, if you wait until 2010 to roll over funds, special rules for that year allow you to pay the rollover tax over two years.
Bankrate.com's corrections policy -- Posted: June 6, 2007
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