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Age impacts Roth IRA conversion debate


Don Taylorq_v2.gifDear Dr. Don,
I'm 64 years old. Does it make any sense for me to pay a large amount in taxes to consider a Roth IRA conversion this year? I do expect to remain in a high tax bracket even after my full retirement at about age 68 to 70.
-- Mark Methinks

a_v2.gifDear Mark,
In your situation, it sounds like your expectations make for some conflict in determining whether to convert a traditional IRA into a Roth IRA this year.

On the one hand, you're near retirement, so frontloading the taxes you'll pay on conversion won't give you dozens of years for the portfolio to increase in value before taking tax-free distributions in retirement

On the other hand, if you don't need the retirement income from the individual retirement account, converting to a Roth IRA gets you out from under the required minimum distributions of a traditional IRA during your lifetime. The RMDs for a traditional IRA start at the required beginning date after you turn age 70½.

There can be some important estate planning benefits from converting to the Roth IRA if your intent is to grow the account for its named beneficiaries and not for retirement income. IRS Publication 590, Individual Retirement Arrangements, has more information about the required distributions for both types of accounts.

You expect to remain in a high tax bracket in retirement. However, if you expected to be in a much lower tax bracket in retirement, you could make a case for staying in the traditional IRA. Distributions out of the traditional IRA are taxed as ordinary income. If your ordinary income rate were to fall, so would the tax bill.

Since you expect to remain in a high tax bracket, it's not as much about the rate as when the taxes come due. You can pay Uncle Sam now or continue to defer taxes and pay him later.

By remaining in the traditional IRA, your tax exposure will fluctuate with the value of the portfolio -- and the tax rate. Converting to a Roth IRA would allow you to know the tax exposure -- you're just left with the investment risk of how the account is invested.

(Yes, the government could come back at a later date and change the tax code to make Roth IRA distributions subject to some form of tax. But when you start playing that "what if" game with tax codes instead of tax rates, you'll never be able to choose between the two types of retirement accounts.)

The federal government is offering an incentive to convert this year versus some time in the future. Convert from a traditional IRA to a Roth IRA in the 2010 tax year, and the IRS will let you pay the taxes due on the conversion in 2011 and 2012.

It's also more attractive to convert if you're able to pay the income taxes due on conversion from a source of funds other than the traditional IRA. If that's the case, Bankrate's Convert IRA to Roth retirement calculator can give you a sense of the numbers based on your expected tax bracket and return on investment.

Still can't decide about the wisdom of a Roth IRA conversion? Talk to your tax professional.

Bankrate's content, including the guidance of its advice-and-expert columns and this Web site, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this Web site is governed by Bankrate's Terms of Use.

To ask a question of Dr. Don, go to the "Ask the Experts" page, and select one of these topics: "Financing a home," "Saving & Investing" or "Money." Read more Dr. Don columns for additional personal finance advice.

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