As promised here is more on Roth IRA conversions. Whether or not to convert your traditional IRA to a Roth IRA is not an easy question and there are many factors involved. We cannot give you specific advice for your situation, but we can lay out some key signs that a conversion may be right for you. Below is our ideal conversion candidate.
1). If you are younger you are more likely to benefit from a conversion, as you are more likely to feel the full effects of government taxation rising. You are also more likely to see your earnings grow. Traditional financial planning might lead you to believe that you will be in a lower tax bracket in retirement as you will not have as much income, however this should never be held as a hard and fast rule. Also, depending on how young you are it is likely that you will actually have more income in retirement than you currently have.
2). If you have the ability to pay the taxes on your conversion from assets or income outside of your IRA you will be more likely to benefit from this conversion. If you are not able to pay the taxes from outside of your IRA then there is a good chance you should not carry out a conversion. This is especially true if you are younger than 59 and ½ as this will lead to a 10% penalty on the funds you take from the IRA to pay the taxes.
3). The longer you have until you will need to take the money out of the Roth IRA the better off you will be, but if you do not believe it is likely you will be able to hold off on taking these funds until you are at least 75, then a conversion may not be right for you.
4). To make this move you have to believe that the government will not change the rules on Roth IRA’s or traditional IRA’s in a way that will put you at a disadvantage. We firmly believe that you should diversify how you hold your assets so that if tax laws change unfairly you are not put at an enormous disadvantage. People tend to believe that the government will have to be fair in the changes they make, however history shows us that this has not always been the case. Honest citizens have made financial decisions based on rules in place at a given time and have seen significant derailment to their financial well being after the government decided the rules would change. This issue is beyond the scope of this entry; however look at the tax law changes in 1986 for several examples of this (or just asks anyone who owned rental properties at that point in time). The changes in social security are also good examples of these changes.
If you are interesting in converting your IRA to a Roth IRA talk with your advisors about your specific situation to see if a conversion in right for you. Keep in mind that you do not have to convert all of your IRA, and a partial conversion may help diversify how your assets are held.