Roth Conversion – An Opportunity?

Ever since 2010, more and more people can make Roth IRA conversions.

Previously, these people were unable to do so because they made more than $100,000 per year. However, lawmakers have temporarily removed this restriction. Some view this as a fantastic opportunity. Is it?

Based on the hype, it’s hard to think otherwise. There are plenty of benefits to Roth IRA, which we don’t need to go into right now. However, conversion could be a great mistake.

The oddest thing is that people who make more than $100,000 per year are currently in a fairly high tax bracket. If they convert traditional retirement assets to Roth assets, they’ll pay dearly. In a way, it is brilliant for the government to offer this “opportunity” – they’ll collect nice tax revenues over the next few years.

However, maybe it really does make sense to convert (even if you’re currently in a high tax bracket). It depends on what you think, believe, and need. The following factors would make it more attractive to convert:

  • tax rates are at historically low levels
  • you don’t want to be forced to take required minimum distributions at age 70.5
  • you believe that tax rates will increase dramatically
  • you want to diversify the tax status of your money (if you have little or no Roth money)
  • you want to reduce the likelihood of your Social Security benefits being taxed

However, if the factors above do not apply to you (or not to a great degree), you should hesitate before jumping on the conversion bandwagon.

No matter what your situation, run the numbers before converting. Talk with your tax advisor to see what the trade-offs are.

Like many things, the 2010 Roth conversion opportunity is not an all-or-nothing thing. It may make sense to convert some of your traditional assets, but you don’t have to convert everything.

Food for thought: