Cook Wealth Management Group

Is Roth Conversion Right for You?

As of 2010, most individuals are eligible to convert their traditional retirement accounts to Roth IRAs, even if their modified adjusted gross income is more than $100,000.

But just as the newness of a product doesn’t automatically make it useful to you, eligibility is not an adequate reason to convert to Roth. To determine if conversion could be beneficial for you, ask your advisor to consider it from all angles. Whether you plan to maximize your retirement income or preserve your estate for beneficiaries, the specific goals your advisor is helping you work toward should provide the basis for your Roth conversion discussion.1

Questions to Consider

Does your tax professional work with your financial advisor?

The particulars of Roth conversion overlap both fields. Roth conversion is not solely a tax matter, so to get an accurate idea of what it can do for you, your accountant should collaborate with your financial planner.2

Are you certain that your tax rate won’t change?

Converting may be worthwhile to avoid Required Minimum Distributions, as long as your tax rate is stagnant and you have outside dollars to pay the tax upon conversion.**

Are you already in the highest current tax bracket?

If you’re in the 35% bracket, you’re newly eligible but not as likely to benefit.

Do you need your IRA to live on?

If not, you could possibly afford to convert and let your Roth account grow tax-free, making it a desirable asset to leave to your grandchildren, especially if they’re in a high tax bracket when they inherit it.** (Heirs must periodically withdraw from their inherited Roth IRAs.)

Does your tax professional recommend “tax diversification” for you?

Waiting until you retire to convert means your entire account will be taxed at a future – presumably higher – rate. A partial Roth conversion is often more favorable, and can be considered a form of “tax diversification,” meaning multiple tax rates give you a chance at less tax overall. Your investments are diversified; it may be beneficial to diversify your tax holdings too, between tax-deferred, tax-free, and taxable.**

Do you have a plan?

Future tax rates are susceptible to future Congresses; there is no guarantee that the foreseeable benefits of Roth conversions will actually occur.** And, consider the unknowns – could you retire in a different state or possibly not live as long as anticipated? These variables can greatly sway the outcome of the conversion, making it imperative to talk to your financial advisor about the pros and cons of converting to a Roth as it relates to your unique situation.


This article is based on content from: **“Bonanza or Bust?” by Richard F. Stolz. Journal of Financial Planning, Dec 2009, 18-25 and *“2010 Roth Conversion: Look Before You Leap,” by Rande Spiegelman, www.schwab.com.
1 Restrictions, penalties, and taxes may apply. Unless certain criteria are met, Roth IRA owners must be 59 ½ or older and have held the IRA for 5 years before tax-free withdrawals are permitted.
2 This information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. We suggest that you discuss your specific tax issues with one of our tax professionals or another qualified tax advisor.
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