Martin Tate Partner Advises How To Convert Traditional IRA to Roth IRA

Converting A Traditional IRA To A Roth IRA Does It Make Sense?
Jeffrey E. Thompson | 01/2010

Under prior law many individuals were not eligible to convert a traditional IRA to a Roth IRA because their modified adjusted gross income exceeded $100,000. Starting in 2010 the income limitation does not apply, making it possible for everyone to convert a traditional IRA to a Roth. In essence, individuals have been given a choice: (a) keep the traditional IRA and delay paying income tax until distributions begin; or (b) convert to a Roth and pay income tax now but not in later years when distributions are made.

Deciding which choice to make is more than just trying to guess whether future tax rates will be higher or lower. The Roth has two advantages over a traditional IRA that may make conversion more attractive to taxpayers even if their future tax rates fall. First, if an individual can pay the tax resulting from the conversion from other funds rather than from his IRA, he can leave more money in the Roth to grow tax-free. Second, funds in the Roth can grow tax-free for a longer time than in a traditional IRA. This is because a Roth owner does not have to start taking distributions from the Roth when he reaches age 70-1/2. Rather, he can accumulate funds in his Roth IRA until his death. Distributions don't have to commence until the beneficiary of the inherited Roth is required to take them beginning at age 70-1/2.

The decision whether or not to convert to a Roth will depend on several factors. Consequently, there is no ready-made answer to the question whether it makes sense to do so. Here are some considerations, though, which a person should weigh in making the decision. A conversion might make sense if the individual:

(1) Can pay the income tax on conversion from other (non-IRA) sources of funds;

(2) Doesn't expect his marginal tax rate to decline much after retirement;

(3) Has other investment assets and doesn't expect to rely heavily on the IRA for retirement spending;

(4) Doesn't plan to leave the IRA to charity; and

(5) Does intend to leave the IRA to family members who would likely stretch out the payments over their lifetimes.

If these considerations fit your situation, you may be a good candidate for converting a traditional IRA to a Roth. We can help you evaluate these and other factors and can also advise you about related estate planning considerations.