Converting To A Roth IRA: Is It Right For You?

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ROSELAND – Roth IRA conversions have been a hot topic this year. New rules have made 2010 the first year that there is no income limit for Roth IRA conversion eligibility. Because of that, many taxpayers have access to a Roth IRA for the first time.

How do you know if converting your traditional IRA to a Roth IRA is right for you? According to the personal financial planning experts at the New Jersey State Society of Certified Public Accountants (NJSCPA), it is a complicated decision that requires careful analysis of each individual’s financial situation.

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There are two main things to consider: the effect on your finances during the year of Roth conversion and the effect at retirement. People who are convinced they will face higher tax rates in the future may want to consider converting their traditional IRA to a Roth IRA, locking in at today’s lower income tax rates.

What are the advantages of the Roth IRA?

  • Distributions are tax-free if certain conditions are met
  • Assets can be retained longer because there are no required minimum distributions during retirement
  • Heirs can inherit Roth IRA funds tax-free
  • Lower taxes for those families subject to estate or inheritance tax

Will my 401(k) be affected?
Retirees who have account balances in 401(k) plans may convert that money directly into a Roth IRA in 2010. For tax purposes, the transaction will be treated as a lump sum distribution into a traditional IRA, followed by an immediate conversion to a Roth IRA.

Will my Roth IRA conversion be taxed?
After-tax plan contributions are not taxed in the rollover to a Roth IRA. Otherwise, all contributions and all accumulated earnings must be included in taxable income.

What is the benefit of converting before the end of 2010?
In 2010 only, taxpayers will have a choice. You can report the entire amount of your conversion in 2010 or defer taxes by reporting the income ratably over two years, in 2011 and 2012.

Consider holding off or only doing a partial Roth conversion if:

  • You would use part of the conversion amount to pay taxes. In order for a conversion to make sense, you must be able to pay the taxes on the conversion amount from outside your retirement funds.
  • Your conversion amount would place you in a higher tax bracket. If doing a full conversion will place you in a new tax bracket, you may wish to convert over a few years.
  • You expect to be in a lower tax bracket at retirement. If you expect to be in a much lower tax bracket at retirement, it may not make sense to convert now. The final decision depends on how many years you have until retirement and how much growth you expect.
  • You want to avoid increased taxation of your Social Security Benefits and/or Medicare premiums.

Deciding whether to convert from a traditional IRA to a Roth IRA can be a series of complicated calculations that have a long-term impact. Individuals considering a Roth conversion should consider working with a CPA to make the most informed decision possible.

If you don’t have a CPA, you can easily locate one online using the NJSCPA’s free, online Find-A-CPA service. Just go to www.findacpa.org, and in a few clicks you can locate a highly qualified professional who can assist you.

For more information on various personal financial matters, visit the NJSCPA’s public service website at www.MoneyMattersNJ.com. While visiting, you can subscribe to Your Money Matters, the NJSCPA’s free, monthly email


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