Should I Convert to a Roth IRA?

Release of the income caps for the conversion of traditional IRA assets to Roth IRA assets has lead to a scurry of conversions.  The catch is that if you took a tax deduction for your contributions to the IRA, you must now pay taxes on any monies you now transfer into a Roth IRA.

The Roth is very popular and, generally, potentially a great deal because Roth IRA assets grow tax free and are distributed tax free.  In addition, if you don’t need the money, you can keep the assets in the Roth for your entire lifetime.  There are no lifetime required mandatory distributions.

Assets in a traditional IRA grow tax deferred, but are taxed upon distribution out of the IRA.  Because the government wants to get the tax dollars, traditional IRAs have required minimum distributions starting April 1^st after the year the participant (i.e. you) turns 70 1/2.

So, for many a Roth may seem like a good ideae but for the taxes due on conversion.  Because of the tax issue, conversion needs closer examination.

• For those who were above the income limits and didn’t take an income tax deduction for IRA contributions, there is no tax due on conversion.
• For those who need to offset business losses and mortgage or student loan deductions, a Roth conversion (or partial conversion) works.
• For individuals who think they will be in a higher tax bracket in the future, the conversion may be worth the price of admission.
• For individuals who think that, in general, income taxes will increase in the future, the conversion may make sense.

Be sure to consult with an experience and  qualified estate planning attorney or financial or tax advisor who is well versed in IRAs to discuss and analyze potential conversions from a traditional IRA to a Roth IRA.  And, while you’re at it, take a close look at your IRA and Roth IRA beneficiary designations to make sure they meet your current estate planning goals.

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Timothy P. Murphy

Timothy P. Murphy is an estate planning and elder law attorney whose practice emphasizes helping people to build, preserve and pass on their wealth. He works with his clients to accomplish their goals while avoiding unnecessary court proceedings and minimizing or eliminating exposure to death taxes.

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