Roth IRA conversions aren’t the news of the day any longer, but they are still a great financial tool for many. Thanks to Obama extending the Bush tax cuts, individuals considering a Roth conversion are paying their “tax dues” at attractively low rates. The pros and cons of a Roth conversion does usually involved a complex analysis of each individual’s situation. However, the basic reasoning behind a Roth conversion boils down to this: you are going to have to pay taxes on that money some time; will it be cheaper to pay it now or pay it later? Here are some example situations to consider:
For those who are high income earners (and therefore in high tax brackets), at first glance, it may not seem beneficial to do a Roth conversion. However, they should also consider that their “high” tax brackets are at historically low income tax rates. If -or should we say when- tax rates go up, 35% might seem attractive after all. This is particularly relevant to those who have significant pension benefits which would cause retirement income levels to be high also.
Some of you may have dismissed the idea of a Roth conversion because all your retirement assets are inside an employer plan so you have no IRA assets to convert. Most people, however, are eligible to make non-deductible IRA contributions and could pay little or no taxes on the conversion. It takes a little more paperwork and diligence to work through the tax implications but it is fairly easy to accomplish.
Some of you may have ALL your money inside an IRA and gasp at the idea of paying the IRS “that much money.” Did you know that you can do partial Roth conversions? You do not have to convert your entire IRA account, you can choose exactly how much you want to convert and pay taxes on. You can even choose exactly which investments inside the IRA you want to convert so that your asset allocation does not get affected by a conversion.