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On January 1, 2010, the IRS lifted certain income cap restrictions on converting a Traditional IRA to a Roth IRA.  Whether or not to convert is not strictly a black and white issue, and there’s no one answer.  Some factors that go into the decision include:

  1. What is your tax rate today?  If it is low, conversion may make good sense.
  2. If your future tax rate increases significantly, money converted to a Roth IRA will not be impacted because future withdrawals (if you are over age 59 ½) are not taxable.
  3. Conversions are only appropriate for individuals who have non-IRA assets to pay the taxes due on conversion.
  4. If you are in a low tax bracket, and do not have enough earned income to utilize all of your itemized deductions, a partial conversion is appropriate.  (Partial conversions are permissible for any reason.)
  5. If you have previously made non-deductible IRA contributions (as evidenced by Form 8606 on your tax return), and have little or no other IRA type accounts, converting the balance to a Roth IRA is advantageous.
  6. Taxpayers who convert to a Roth are able to “re-characterize” the assets back to a Traditional IRA, effectively allowing the taxpayer to negate the conversion.
  7. If you have the wherewithal to pay the entire tax upon conversion on your 2010 tax return, rather than spreading the conversion tax liability over years 2011 and 2012, you can elect to do so.
  8. Roth IRAs are not subject to the IRS’ Required Minimum Distribution requirements at age 70½ like Traditional IRAs.  Consequently, a Roth account can continue to grow tax-free for a longer period of time.
  9. Heirs of a Roth IRA receive the same tax-free growth and distribution rights over their lifetime as the taxpayer who originated the account. This is particularly helpful as an estate planning tool.
  10. Roth contributions are accessible immediately, both tax- and penalty-free.  Roth conversion amounts are accessible both tax- and penalty-free five years after conversion (even if not age 59½).

Under the right circumstances, a conversion to a Roth IRA can potentially provide retirement tax advantages or add significant wealth for future generations.  Contact your Moneta Group Family CFO to help determine whether a Roth conversion is right for you.

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Robert Hehmeyer III J.D.