Wish you'd opened a Roth instead of
a traditional IRA? You might be able to get a do-over.
The only downside: You have to pay regular income tax
now on any money you convert. But when you take out
money at retirement, it will all be tax free. And, with
a Roth, if you need to access your own contributions
before retirement, you can do so without penalty.
The choice is "whether you want to pay now or
pay later," says Ed Slott, CPA, author of "Parlay
Your IRA into a Family Fortune."
His pick: the Roth. "It takes the worry about
future tax rates out of the equation," he says.
But before you decide, here are a couple of questions
to ask yourself:
- Is your income (single or married filing jointly)
more than $100,000? If so, Roth conversion isn't an
- Are you married filing separately? Again, if so,
you can't convert.
- Do you have the money handy to pay tax on the amount
you convert? (Remember, you're paying it at your regular
income tax rates.) If not, or if you have to take
it from your IRA, conversion probably isn't a good
option for you. "You don't want to dip into the
IRA to pay the tax," says Slott. "That's
not viable economically."
But for some IRA holders conversion is
a good option. Best bet: talk to your tax pros to see
if it's right for you.
If you find that you have a lot of deductions and not
much income one year, that's a "perfect time to
do a Roth conversion," says Peggy Kabaniss, CFP,
chair of the National Association of Personal Finance
Advisors. Not only do you get the benefit of conversion,
but by forcibly increasing your income (money moved
counts as income), you can take advantage of all the
deductions coming your way.
"If you find yourself in a situation where income
is lower and itemized deductions are higher, it's a
great tax strategy," she says.
That's why it can sometimes be a good move for individuals
or couples who've seen their income dip one year.
It also can be helpful, "with older people with
really high medical expenses," says Kabaniss. "If
you have someone who needs around the clock care, you
can have home health care costs of $60,000 to $100,000,
in which case you might actually need taxable income.
Converting to a Roth is a great way to force taxable
Or if you're wealthy, and want to pass this account
untouched to your heirs, converting it into a Roth can
be a good strategy, says Barry Picker, CPA with Picker,
Weinberg & Auerbach. Unlike a traditional IRA, a
Roth doesn't force you to start taking money out at
age 70 ½. And in some estate situations, converting
to a Roth (and paying taxes now) can improve the tax
picture for heirs, says Picker.