Should You Convert To A Roth IRA?

With a Roth IRA you pay income tax now and not upon distribution.  With a traditional IRA you defer taxes today and pay income taxes upon deferral.  When you convert a Traditional IRA to a Roth IRA you must pay regular income taxes on the amount that is converted.  The advisability of converting to a Roth depends on the length of time you have until you take distributions, your tax rate today and your anticipated tax rate upon retirement and your projected return on your investments.

When you run your numbers through one of the numerous calculators available on the internet you may or may not see a big savings in doing a Roth Conversion.  However, there are several other factors that may tilt the scale toward converting some of your money to a Roth.

  • Income tax rates are currently very low and there is a general consensus that they will increase considerably by the time you start taking distributions.  With a Roth conversion you pay the tax now at the lower rates and take tax free distributions when the tax rates are higher.
  • The stock market is still down about 25% from where it was in August of 2008.  There is a lot of cash sitting on the sidelines waiting to be invested once consumer confidence is restored.  You can pay taxes on money in your traditional IRA while the share prices are low and take a tax free distribution from your Roth down the road when the market has rebounded.
  • You may have a sizable portion of your portfolio in tax deferred retirement accounts on which you will have to take required minimum distributions (RMD).  This could put you into a much higher tax bracket.  By converting some of your traditional IRA into a Roth you can get some tax diversification on your portfolio.  This will lower your RMD– because there is no RMD on a Roth IRA. Diversifying your portfolio between a traditional IRA and a Roth IRA enables you to take your distributions from the most appropriate pot of money in any given year.

About the author

Jane M. Young, CFP®, EA, MBA, CDFA

Jane M. Young is a Certified Financial Planner and co-owner of Pinnacle Financial Concepts, Inc. and Divorce Solutions, Inc. She has been a financial planner since 1996. She is also enrolled to practice before the Internal Revenue Service. Prior to becoming a financial planner Jane held several management positions at Digital Equipment Corporation and Quantum Corporation, where she worked for 14 years. Jane holds a Bachelor of Science degree in Business Administration from the University of Colorado and an MBA from the University of Colorado. She has also completed the two year Certified Financial Planner Professional Education Program with the College for Financial Planning.

Jane is very active in the community. She is the immediate past president of the Rotary Club of Colorado Springs and a past president of Leadership Pikes Peak. She is a graduate of the Leadership Pikes Peak class of 2004. She is a past president of the Financial Planning Association of Southern Colorado and a past president of the Pikes Peak Chapter of the National Association of Women Business Owners. Jane is also a member of the University of Colorado at Colorado Springs, College of Business, Alumni Leadership Team. Jane is a graduate of the Leadership Program of the Rockies class of 2009 and a graduate the Colorado Springs Leadership Institute class of 2011. She is also a member of the Estate Planning Council and Artemis. Jane was selected as a 2010 Woman of Influence by the Colorado Spring Business Journal.

As a fee-only financial planner Jane is a member of the National Association of Personal Financial Advisors, the Financial Planning Association, the National Association of Tax Professionals and the Alliance of Cambridge Advisors. She has been quoted in several local and national publications including The Wall Street Journal, US News and World Report, Consumer Reports, Investment News, MSN Money, Kiplinger Magazine, Financial Advisor Magazine, Bankrate.com and the Colorado Springs Business Journal. She also works as a volunteer instructor to new advisors with the Alliance of Cambridge Advisors and has worked as an adjunct instructor at the University of Colorado at Colorado Springs.

Jane is from St. Louis, but grew up in Colorado Springs. She enjoys skiing, golfing, traveling, hiking, painting and learning to speak French.

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