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Articles: Is it still a good time to convert?

Let’s start with a brief comparison.  Distributions from a traditional IRA are generally taxed at ordinary income rates currently reaching as high as 35%.  (Future tax rates are expected to rise.)

The taxable portion includes earnings within the tax-deferred account and amounts attributable to deductible contributions.

Much has been written about Roth IRA conversions in recent years.   And  with  good  reason:  A conversion can provide the potential for future tax-free payments and a way to preserve a nest egg for your heirs.  For 2010 only, you could even elect a two-year deferral on the resulting tax. But can a conversion still make sense in 2013?

The short answer is “yes,” but it depends mainly on your personal circumstances.   Furthermore, you should take other extenuating factors into account.

In contrast, “qualified distributions” from a Roth IRA are completely tax-free.  A qualified distribution is one from a Roth in existence at least five years that is made after you’ve reached age 59½; upon death or disability; or to pay for first-time home-buyer expenses (up to a life-time limit of
$10,000).  Other distributions are treated as coming first from Roth IRA contributions, second from amounts transferred to the Roth and third from earnings.

In effect a conversion of assets from a traditional IRA to a Roth is treated as a withdrawal for tax purposes. So you are generally required to pay the usual amount of tax when you convert.

Yet the current tax cost may be worth it in exchange for future tax-free distributions.  (For a conversion occurring in
2010, you could choose to have the taxable income from the conversion split evenly over the following two years.)  Also, unlike a traditional IRA, you don’t have to take minimum distributions from a Roth after age 70½.

But there are potential drawbacks to a conversion.  For instance, if you have to use funds from your IRA to pay the resulting tax, it will likely dilute future benefits.  Some of the other key factors to consider are

  • your age, your spouse’s age (if married) and the ages of the beneficiaries
  • the value of the assets in your IRA
  • the need to receive Roth IRA distributions in the future
  • the projected investment rate of return
  • any state and local tax implications
  • if nondeductible amounts were contributed to the traditional IRAs

These factors will have a substantial impact on your decision and require a careful analysis of your situation.   Be wary of online calculators that leave out critical factors.

Finally, note that a conversion is not necessarily an all-or-nothing proposition.  If it suits your purposes, you might opt for a partial conversion or a series of conversions over several years.  By structuring things carefully to keep your income below certain levels, you may be able to reduce the impact of higher tax rates and the 3.8% Medicare surtax in 2013 and beyond.

Everyone’s situation is different.  Obtain more details concerning these tax-related aspects.


This newsletter/advertisement is produced for our clients, friends and associates through an arrangement with WPI Communications, Inc. for the representatives’ use. Although the editorial content is professionally researched, written and edited, neither our firm nor any of its agents, representatives or associates make any representations regarding the accuracy of the content or its applicability to your situation. The information in this communication is not intended as tax or legal advice. In accordance with IRS Circular 230, the information provided herein may not be relied on for purposes of avoiding any federal tax penalties. Any tax advice contained in the body of this material was not intended or written to be used, and cannot be used, by the recipient for the purpose of 1) avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, or 2) promoting, marketing or recommending to another party any transaction or matter addressed herein. You are encouraged to seek tax or legal advice from an independent advisor.

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