Golden Opportunities

New laws make it possible for anyone to turn their regular IRA into a Roth IRA. And Rothercizing your IRA can mean supersizing your retirement accounts. But is Rothercizing right for you? Here to answer is our financial quarterback, Jim Lineweaver, founder of the Lineweaver Financial Group.

Question:What are some of the advantages of a Roth IRA?

Answer: Withdrawals from a Roth IRA are tax-free; so many people would rather make contributions to a Roth IRA over a traditional IRA. For most people that makes sense.
But what about converting a traditional IRA to a Roth IRA? Does that also make sense to most people? Since the future withdrawals from the Roth are tax free, it certainly sounds tempting.

Question:Let's talk about that. Conversions from a regular IRA to a Roth are going to become easier, right?

Answer: There are changes to the tax laws which will take effect in 2010. These changes allow anyone to convert their regular IRA to a Roth IRA. Prior to that, only those with adjusted gross incomes below $100,000 could convert. With this change, many more will be eligible to convert. It makes this topic relevant to all who have traditional IRAs, or any other type of retirement plan like 401(k)s.
Conversions are not a simple issue, and there are no simple answers. Whether or not it's a good idea depends on the tax considerations, and other non-tax issues. You need to understand the issues, and how they relate to your particular situation. Either you need to seek advice, or do all of the homework and math on your own.

Question:Can you give us some general information about conversions and what they entail?

Answer: In general, by converting from a traditional to a Roth IRA, you are trading tax dollars now for the elimination of tax dollars in the future. Is this wise, and will you come out ahead?

Answer: If your marginal tax bracket will be higher in the future, it may make sense to convert now. If your marginal tax bracket will be lower in the future, keep you money in your IRA and don't convert to a Roth.
When you convert, all of the pre-tax contributions made in your IRA and all earnings are taxable. That can be significant.
Are you going to withdraw money from the IRA to pay the tax, or are you going to use other taxable assets to pay the tax? This further complicates the decision. If you are going to withdrawal from the IRA, and you are under 59 ½, you will have to pay a 10% penalty to the IRS for an early withdrawal. And now you must attempt to calculate how long it will take your Roth to grow to make up for the assets that were used to pay the taxes. This applies to whether the tax money came from inside the IRA or outside.

Question:How can each of us apply conversions to our particular financial situation?

Answer: There are calculators that can help you weigh the alternatives, and of course, you can talk to your financial advisor.
Be sure to review the impact of the conversion. It really boils down to your present marginal tax bracket, and your future marginal tax bracket. If your tax bracket will not change, staying with your traditional IRA or converting to a Roth IRA leads to the same after tax results no matter what time frame your are looking at. If you future tax bracket will be higher, it may make sense to convert. If your marginal tax bracket will be lower, it will probably not pay to convert.

Question:What if you will not need the money in your IRA to live on in the future?

Answer:By converting to a Roth IRA you will avoid the required minimum distributions that begin from a traditional IRA at age 70 ½. This will allow the account to grow to be ultimately received by your heirs tax-free.

We're out of time today, but I'd like to get you back soon so you can take another "pass" at discussing the estate planning benefits of converting a regular IRA to a Roth. (I say pass, because you're the financial quarterback). IRA conversions are worth a "convert-sation." Is a Roth right for you? To converse with an expert, give Jim a call.