Currently, you can convert your traditional IRA to a Roth IRA if your adjusted gross income is less than $100,000. In 2010 the income limitation is being lifted for one year only, so now is the time to start thinking if a conversion is right for you.
When you reach age 70 ½ you can no longer contribute to a traditional IRA. In fact, you must start required minimum distributions at that time. There are no required minimum distributions with a Roth account and you can continue to contribute as long as you have earned income. A contribution to a traditional IRA is tax deductible if you meet the eligibility rules on income; a contribution to a Roth is not tax deductible. However, all withdrawals from a traditional IRA are taxed like ordinary income; Roth withdrawals are not taxed.
The downside for the conversion is that you must pay taxes on the amount you convert, but taxes on 2010 conversions can be spread out over 2010 and 2011. Of course, we don’t know what the future will bring but I’m fairly sure it will still include taxes. In retirement it would be a benefit to have several sources of income — taxable accounts billed at the capital gains rate, retirement money taxed at your ordinary income tax rate, and Roth money that is tax free. Or, you could leave the Roth account to your children and they could enjoy tax free withdrawals for their lifetime.
Please contact your advisor if you are interested in the Roth conversion.
Barbara Gray, CFP®