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The rush to Roth IRAs

By Kay Bell ·
Tuesday, November 16, 2010
Posted: 11 am ET

Most tax watchers expect Congress, during its lame duck session that began this week, to continue the Bush tax cuts for at least a little while. Such predictions have prompted a rush to Roth IRA conversions.

A Roth retirement account doesn't offer an immediate tax deduction for any contributions, but there is no tax on the money when it is eventually withdrawn. This year, more people became eligible for a Roth IRA when the $100,000 income limit on converting such accounts was removed. Now anyone, regardless of income, can move traditional IRA money into a Roth.

But there's a catch -- there will be taxes due on converted money. But the conversion pot was sweetened by a tax law change that allows folks who convert a traditional Roth IRA to a Roth IRA to defer those tax bills into the 2011 and 2012 tax years.

When it looked like the current low income tax rates would end on Dec. 31, tax deferral didn't seem so appealing. Why opt to pay a higher tax rate in a few years?

But now, with the chances improving for continued lower tax rates, a rush is on to convert to Roth IRAs and defer associated taxes.

Reuters reports that by Sept. 30, Bank of America Corp. had completed 35,000 Roth conversions and that Fidelity, the country's largest retirement plan provider, had done 135,000 Roth conversions through the end of October. Both companies say they expect to see a surge in conversions before the year ends.

A Roth conversion, both of your IRA or your workplace 401(k) retirement plan, is one of the year-end tax moves suggested in my 5 tax moves to make now story.

But remember that a Roth isn't for everyone. Most of those converting to a Roth IRA are wealthy and are taking advantage of the double savings: splitting and deferring taxes on the conversion amounts at low tax rates, and then getting all that untaxed retirement money when they retire.

For some people, however, converting to a Roth doesn't make sense. So evaluate your personal financial, retirement and tax situations before you make the leap. This IRA conversion calculator can help.

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