Regular to Roth IRA: Convert or Not

Do you know you have an excellent opportunity to shelter your retirement savings from future tax increases? As of Jan. 1, 2010, if you want to convert your regular IRA to a Roth IRA, the income limitation of $100,000 has been lifted. And you don't have to pay the conversion taxes all at once. You can spread them over two years instead of paying them all in 2011.

These are both good reasons to convert, but it might not be the best idea for you. Take a look at the pros and cons:


The younger you are, the smarter it is to convert to a Roth. Even though you'll have to pay the ordinary income taxes on the money you convert at your current tax rate, you'll come out ahead:

  • A Roth IRA allows tax-free growth and tax-free income distributions at age 59½ or older as long as you have held your Roth account for five years or longer. The sooner you start, the longer you have to grow your retirement savings tax-free.
  • The market has been down, and is only climbing fitfully. Your account value most likely is at a low. By converting now, you may pay lower taxes than if you wait.
  • With looming federal budget deficits, Medicare, and Social Security obligations, there's a good chance tax rates will increase in the coming years. You'll be better off paying those taxes now than later.
  • By converting to a Roth, you avoid the traditional IRA requirement to take yearly minimum distributions starting at age 70 ½. This can leave more for your heirs if you don't use the money yourself.

Even if you're approaching retirement, a Roth still may make sense:

  • A traditional IRA requires you to withdraw funds starting at age 70½, but a Roth doesn't mandate such a rule. The longer you can wait, the more time your money has to accumulate tax-free.
  • Under the present tax laws, converting a traditional IRA to a Roth can lower the size of your taxable estate. Think: Decades of tax-free growth.
  • If you name your spouse as the beneficiary of your Roth, and your spouse forgoes withdrawals after you die, those Roth IRA assets keep compounding untaxed for the rest of your spouse's lifetime. If your spouse could name a child as his or her beneficiary, the tax-free compounding goes on.

Maybe not convert

No matter what your age, there's reason to think twice about converting: You will pay taxes now. Do you have enough in savings to cover these taxes?

If not, don't convert. It will not benefit you to pay for the taxes out of your current IRA. If you're younger than 59½, you'll have to pay a penalty to take the money out of your IRA. In addition, the amount you take out to cover the taxes will lose the chance for tax-free compounding from now and forever.

Conversions can seem confusing, but the IRA specialists at HUECU are ready to help. Check out our Online Retirement Planner and review the HUECU Individual Retirement Accounts. You can also stop by any of our branch locations, call us at (617) 495-4460 or email us for more information.


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