Financial Q&A: Is the time ripe for Roth IRA conversions?
Have a personal finance question? E-mail Steve Dinnen at work@csps.com
from the May 5, 2008 edition
Q: Would it be a good idea to change my IRA to a Roth for this tax year since so many mutual funds have gone down in price? Would it mean that the tax consequences would be less this year?
A: This will depend on each person's individual circumstances, says Jeremy E. Portnoff, a financial planner in Westfield, N.J. First to consider is the ability to do a Roth conversion. Your Modified Adjusted Gross Income (MAGI) must be under $100,000. And you'll have to make a reasonable estimate of whether you're likely to be in a higher or lower tax bracket in retirement.
A Roth conversion makes sense if you assume higher tax brackets and rates in the future. With the conversion you have placed your money into an account that's free of income taxes and is also forever free of required minimum distributions. This latter feature allows you to grow those retirement savings for as long as you wish.
If you're not eligible to convert now, Mr. Portnoff says you can wait until 2010 when the income restriction is lifted. This doesn't help much if your strategy is to convert this year because of losses in the IRA. But it still leaves plenty of planning time for other strategies. For example, someone who is ineligible to convert may also be ineligible to contribute to a Roth, in which case, they should consider making nondeductible IRA contributions through 2010 and then convert when eligible.
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