Should I Convert to a Roth IRA?

There is a lot of interest in converting traditional IRAs into Roth IRAs this year. A Roth IRA is funded with after-tax contributions, the money grows tax deferred and withdrawals are tax free. Roth IRAs have no minimum distribution requirements upon retirement so the money can continue to grow tax deferred long past a traditional IRA. Converting from a traditional IRA to a Roth IRA creates taxable income of the amount of this conversion.

Beginning in 2010, the IRS and the State of Wisconsin have eliminated the $100,000 adjusted gross income cap for conversion. Now all taxpayers are eligible to make the Roth conversion. In addition, for 2010 only, taxpayers can elect to defer claiming the income on conversion until 2011 and 2012. The 2010 conversion is not limited to just traditional IRA’s. Any old 401(k)s or other retirement plans from a previous employer will also be allowed to convert as well.

Just because you can convert to a Roth IRA doesn’t mean that you should. Each situation needs to be evaluated individually. Making the absolutely correct decision requires magical powers to foretell the future. We are not magicians, but Wegner CPA’s are able to assist you in analyzing your situation. The following issues should be considered in making your decision.

• Do you anticipate being in a lower or higher tax bracket in the future?

  If you think your income tax bracket will be lower when you retire, it probably does not make sense to convert your IRA. If you think your tax bracket will be the same or higher when you retire then it is today, then a ROTH IRA makes sense, especially for younger workers who have many years of increasing earnings before retirement.

• Do you have the cash to pay the tax obligation created by the conversion without taking it from your IRA assets?

  If you want your money to grow tax free it is best to maximize how much it can grow. You should not convert to a Roth if you have to use part of the amount you are converting to pay the taxes.

• Will you need the funds in the IRA for your retirement?

  If you plan to leave your IRA to an heir, a Roth IRA has advantages. Since there are no minimum required distributions for a Roth IRA, you can leave the amount in the Roth untouched for your beneficiary. Your beneficiary would not have to pay income taxes on the Roth and would have their lifetime in which to spread out the

distributions.
• Converting now comes with the advantage of hindsight.

  If you convert now you have until October 15 of 2011 to undo the conversion and put the money back into a traditional IRA without taxes or penalty. In addition, if you convert several traditional IRAs with different assets into separate Roth IRAs you can retain the ability to cherry-pick which investment assets to recharacterize . This would allow you to recharacterize conversions that had decreased in value while preserving those that had increased in value.

The decision to convert is complex. If you have additional questions about Roth IRA conversion please contact your Wegner tax advisor.