This is the first article in an eight part series on Roth IRA conversions. For other articles, please see:
Part 2 – The Recharacterization Option
Part 3 – The Impact of Income Tax Rates
Part 4 – How Long Can You Stretch?
Part 5 – The Impact of Investment Returns During the First 21 Months
Part 6 – The Impact of Estate Taxes
Part 7 – Ramifications of Charitable Giving
Part 8 – Putting It All Together
A lot of my clients are planning to take advantage of a new opportunity that will be available for the first time in January of 2010. They will be able to convert their traditional IRA account to a Roth IRA account. The conversion opportunity has been available for several years, but only to individuals with less than $100,000 of adjusted gross income.
Roth IRAs offer several benefits. Like Traditional IRAs, Roth IRAs do not have to pay taxes on their earnings. However, unlike traditional IRAs, qualified distributions from Roth IRAs are not subject to income taxes.
Another advantage is that Roth IRAs do not require you to take minimum annual distributions after you attain age 70½. If you designate a child or grandchild as the beneficiary after the deaths of you and your spouse, the child or grandchild will be required to take distributions over his or her remaining life expectancy. The potential for allowing funds to grow in a tax-free environment and be withdrawn over a long period of time makes a Roth IRA a fantastic asset to pass on to children and grandchildren.
If you convert to a Roth IRA, you are betting that the present value of the incremental after-tax distributions to you and your beneficiaries in the future is greater than the taxes you will have to pay at the time of the conversion. Whether paying tax now is a good bet depends on a number of factors including tax rates, and the ability of you and your heirs to keep the Roth IRA intact for a long time.
The analysis is complex. I plan to write several additional blogs regarding this topic in order to help you make this decision.