This year, there are a couple of important changes to bear in mind for individuals considering converting a traditional IRA to a Roth IRA retirement account.
Eligibility, Tax Considerations
Most importantly, the previous requirement that an individual had to earn less than $100,000 to make a conversion has gone out the window, which investment publication Forbes estimates frees up the option to 13 million households with more than $1 trillion in traditional IRA dough. Secondly, taxes that will need to be paid because of the conversion can be delayed and spread out over 2011 and 2012, leaving a couple of extra years to have to settle with Uncle Sam.
The Appeal of a Roth
Converting to a Roth IRA is appealing for a number of reasons. Most importantly, a depressed stock market has lowered traditional IRA balances, which means that fewer taxes are owed because the total dollar values being converted are lower. Additionally, tax rates are heading higher, with tax brackets returning to pre-2001 levels at the end of 2010 as the Bush-era tax cuts expire and a tax-and-spend rhetoric currently sweeps through Washington. Traditional IRAs also carry mandatory distributions starting at age 70. Roth IRAs don’t have this requirement.
Roth IRAs are most appealing to younger individuals who have longer to let their investments grow on a tax-free basis. Another important consideration is whether you have the ability to pay the taxes with other funds — because the tax hit can be substantial to your portfolio and the top bracket will again reach 39.6% in 2011.
In general, those who are able to leave their retirement assets untouched for at least a decade should seriously consider converting to a Roth IRA in 2010. A number of financial Web sites will let you run scenarios to help make sure what the best option may be. As a final consideration, there is a get-out-of-jail-free option: Even if the predictions from your crystal ball on taxes, market performance, and related matters don’t come to fruition, you have the ability to undo the conversion by October 15 of the following year after the conversion is made.