Trap No. 5: Verify the transaction
When you call your financial adviser's office and instruct him or her to convert your IRAs, it's reasonable to assume the job gets done. But sometimes mistakes get made -- and if it happens with this, you could be facing a big penalty and tax bill. Slott suggests following up a day or two after your initial call to make sure the move took place. Verification takes less than five minutes.
It may sound like overcautious advice, but more than 500 IRS private letter rulings address the issue of who's responsible for such a mistake. "When you see that many rulings on one issue, you know it's an epidemic," says Slott.
Trap No. 6: Remember the beneficiary form
The most important form with any IRA is the beneficiary form, letting your heirs get the maximum tax benefits from your Roth when you die. Many people -- and, according to Slott, many advisers -- don't realize you need to set up a new one when you convert. But because the Roth is a new account, it's required.
Trap No. 7: Don't forget RMDs
Anyone can convert their IRA to a Roth, but if you're over 70½, you can't convert the whole amount. Required minimum distributions kick in at that age -- and those funds cannot be converted. Required distributions were waived in 2009, but they're back now, and if you try to put them into a Roth, it could trigger a 6 percent excise tax.
Trap No. 8: Watch the market
With the new IRS rules, Roth conversions can be undone or "recharacterized," so even people who have trepidations about switching over from traditional IRAs have a safety net. The trap here is actually letting those doubts stop you from taking action.
"If you convert now -- in 2010 -- you have until Oct. 15, 2011 to change your mind for whatever reason," says Slott. "It's really a risk-free opportunity. ... It's sort of like getting to bet on a horse after the race is over. If the value goes down, you get a do-over. If the value goes up, you get to keep it."
Bankrate's story on Roth conversion investment strategies discusses how to selectively do over Roth accounts that languish.
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