Chartered Financial Consultant


Is it Time to Roth and Rollover?

The Basics

Roth IRAs first became available in 1998. Unlike traditional IRAs, there is no immediate tax break. The advantage of a Roth is that the growth within a Roth investment is not taxed upon withdrawal as long as you are over 59 1/2 and have held the account for five years.

The Opportunity

The opportunity to rollover a traditional IRA into a Roth has always been available if your income was below a certain level and you were willing to pay a large tax bill on the funds transferred.

This year, no income limit applies. If you rollover funds to a Roth in 2010 you have two options: 1) include all the income on your 2010 tax return, or 2) split your income between 2011 and 2012 to be taxed at the tax rates in those years.

The Timing

Even if this opportunity did not exist, this is a good time to convert your traditional IRA to a Roth. Since the stock market is down, your tax will be less than if you converted your account when it was worth more. This is one of the few benefits of a negative stock market. I’m making the bold assumption here that the stock market will go up eventually.

One more reason to do a Roth conversion this year is that many experts predict that tax rates will increase to help balance the federal budget.

An important factor to consider is whether you will be in a higher tax bracket when you take the money out versus your tax bracket when and if you do a conversion. This requires some serious calculations and assumptions.

The Risks and Warnings

Paying taxes now depletes your limited supply of cash, so be cautious.

Do not take the money to pay the tax for the Roth conversion from an existing IRA or retirement account, especially if you are under 59 1/2.

If the account drops dramatically, you will overpay your taxes with more expensive dollars. If your IRA had dropped the same amount you would pay less in taxes on a smaller account value.

The Dilemma

Whether you make the right decision depends on many factors, but the biggest one may be whether your account increases dramatically, stays flat or drops in value. If you invested in a Roth ten years ago your investment might be the same as when it started due to the growth-challenged stock market of the last decade.

The Disclaimer

This discussion just deals with federal tax laws. Each state will treat Roth conversions differently.

You don’t have to switch investments to make this move. It can stay in the same fund, you just change the titling on the account.

The potential scenarios are numerous and the variables are many. Converting a Roth is not a step to take without first talking to your investment person, your tax person and your psychic.

If you want to discuss doing a Roth conversion, call me.

Bob Dreizler

Bob Dreizler