I listened in on a Roth IRA Converstion conference call with a Charles Schwab representative this morning. Schwab.com offers a pretty nice resource for Roth IRAs.
In 15 days an opportunity will become available that will allow people at all income levels to convert a non-deductible IRA to a Roth IRA. Previously, that option was only available to those with modified AGIs of less than $100,000.
As the host of the conference call mentioned, there are definitely some things to think about before making the conversion:
1. Will you be in the same or higher tax bracket in the future when you begin making withdrawals? Of course none of us know what tax rates will be like in the future but I would have to say that they will be HIGHER. Factor in required minimum distributions (RMDs) from taxable plans (there are no RMDs with a Roth IRA) and you might be moved to a higher income tax bracket.
2. Do you have a long time-horizon? The longer the time horizon, the better. You have to factor in the opportunity cost of paying taxes now in order to receive tax-free income in the future.
3. Can you pay the tax on the conversion from sources outside the IRA? You’ll receive little benefit if you have to pull money out of the IRA to pay the income taxes on the conversion.
4. How will the conversion affect your AMT (if you’re subject to the AMT)? A good tax program like TurboTax or Tax Cut will help you walk through those scenarios.
5. Would you use the Roth as an opportunity to pass on assets to your heirs? If this is the case, then other issues may not be of importance to you.
One other thing that is significant about 2010 is that if you make the conversion in 2010, you’ll have the opportunity to have the conversion amount added to your income in equal amounts over the 2011 and 2012 tax years. For instance, say you convert an IRA to Roth IRA and the taxable amount is $50,000. You will be able to have $25,000 added to your income in 2011 and 2012. Of course, something to keep in mind is whether or not you’ll be in a higher tax bracket in those years and whether or not the conversion amount will throw you into a higher bracket.
Lot’s of stuff to consider.
If you have any questions, feel free to leave a comment. I’ll see if I can get the Schwab rep to answer them for you. In the meantime, check out Schwab’s Roth resource. Another helpful resource is IRS Publication 590 (PDF).