Comments on: Should You Convert to a Roth IRA in 2010?

By: PJQ

PJQ — Sun, 24 Jan 2010 16:49:10 +0000

@ETF Topics: Actually, as JLP says in the article, in the future it is almost a guarantee (I said “almost”!) that tax rates will be higher. We are currently in a period of extremely low tax rates and it certainly should not continue.

By: ETF Topics

ETF Topics — Tue, 22 Dec 2009 01:13:30 +0000

Item 3 in Pete’s response is a good one to keep in mind. It certainly makes the calculations trickier.

I am inclined to think that in the future people are more likely to be in lower tax brackets so deferring taxes to the future feels right to me. Of course, following a gut feeling is probably the worst thing an investor can do…

By: Stacey

Stacey — Fri, 18 Dec 2009 13:06:50 +0000

I just did a CPE webinar yesterday and this topic was included. Other points to consider on the conversion is that there is still a 5-yr holding period requirement, you can convert a 401k or other qualified plan (QP)as long as the QP allows a rollover to an IRA, and finally, you can do partial conversions, (you aren’t required to convert the whole balance.) This last point would fall under the “you can have your cake and eat it too!”

As tempting as a conversion is, my (not my husband’s) balances aren’t very high and I’m not a proponent of paying any tax before I have to. I think I’ll just take my distributions down the road and hopefully my/our tax bracket will be low enough my taxes will be neglible or nil.

One very important point to consider (that the CPE moderator couldn’t answer w/certainty yesterday) was the impact of this included conversion “income” now on your 1040 when submitting the FAFSA form for college aid. My opinion is it’s not worth converting until you have a definitive answer on this question of how any aid would be impacted. No good deed goes unpunished…

By: Pete

Pete — Thu, 17 Dec 2009 11:16:42 +0000

Three things to note in the conversion:

1) Higher tax rate isn’t just federal taxes but state and local taxes. If you plan to retire to Texas or Florida or other non-income tax state, the tax savings can offset any federal tax hikes.

2) Federal taxes probably will go up but how will they do it? Lower exemptions and deduction or higher sales tax (move to VAT)? Some of these changes will not effect your inputted tax rate.

3) The conversion will tax your change at the highest tax rate you are in (possibly put you in a higher tax rate). And, with phase-outs, the tax rate could be even higher. When you withdrawal money in retirement, it will be taxed at various tax rates (up to the highest tax rate). And, your income will probably be lower putting you in a lower tax bracket.

This is not a slam dunk decision. You need to understand where you are at and where you will be.

By: Don

Don — Thu, 17 Dec 2009 04:46:44 +0000

@Ketan: In a sense, you’ve already deducted the losses on your account. You got a deduction for the full amount of income you contributed, but now you’ll only have to pay tax on a small amount when you convert. You’ve already gotten to reduce your taxes for that $9500 loss.

By: Ketan Thakkar

Ketan Thakkar — Wed, 16 Dec 2009 21:53:19 +0000

The conversion to a Roth IRA seems to be a good idea. Just wanted to see if you agree and also, if I may have more options.

My wife and I have IRAs which had values in the thousands.

My IRA is actually a 401K converted to IRA 10 years ago. Total deposits were greater than $10K, but current value has fallen now to less than $500.

If I convert now to a Roth IRA, it seems that I have to show the $500 as additional income. Is there anything that can be done regarding the losses. I have all the paperwork that can show the tax basis. It is sad that I have losses yet have to pay tax on it as income and can’t deduct the losses like a standard brokerage account.

Please let me know at the email provided. Thanks so much.

Ketan