IRA or Roth IRA?

To convert or not convert, that is the question. In fact, that is one of the big questions for traditional IRA owners in 2010. Should you convert your traditional IRA to a Roth IRA? In many cases, the answer is yes.

The capability to take tax-free withdrawals from a Roth IRA makes a conversion compelling. However, as with most financial decisions, there are many variables and factors to look at before converting. Be sure to analyze this option based on your own circumstances.

The conversion decision depends on a number of factors, including:

  • Your tax rates today versus those at retirement
  • How will the taxes due on the conversion be paid
  • The amount in your estate, and
  • Your overall estate plan

Under current law, any taxpayer with adjusted gross income (AGI) exceeding $100,000 is ineligible to convert a traditional IRA to a Roth IRA. However, that is about to change. Beginning in 2010, taxpayers of any income level qualify for a Roth IRA conversion. For Roth IRA conversions in 2010, any amount required to be includible in gross income due to the conversion can be included ratably over tax years 2011 and 2012. What that means is that the IRS is actually granting some additional time to pay the income taxes due on the conversion.

Roth IRA Conversion Benefits

So what are the advantages of converting to a Roth IRA? Here are a few:

  • Unlike a traditional IRA, there is no required minimum withdrawals during the life of the IRA owner
  • The money can continue to compound in the account without paying taxes
  • It can be passed to your heirs and continue to grow tax-free
  • Conversion to a Roth will reduce the taxpayer’s taxable estate by the amount of income tax that is paid on the conversion

There is no easy answer to the Roth IRA conversion question. Every situation is unique and should be examined to determine if this strategy best fits your overall estate plan.