Deciding on a Roth Conversion May Come Down To These Two Main Considerations

1.  First, you have to have the money readily available in non-qualified accounts by the time your conversion tax bill becomes due. You can't cash in qualified funds to pay Roth conversion tax bills.  That is a no-no!

2.  Second, you have to have the strong belief that YOUR tax bracket will remain level or go up in the future, even after your retirement.

Trying to convert traditional IRA account money to a Roth which would require you withdraw from the same account to pay the taxes is an instant signal it is not you you!  Don't do it.  It isn't going to do you any favors.

If, however, you feel that your future tax bills will remain level or increase, and you have the cash available to pay Uncle Sam, then the decision to Roth should go to the next step. As long as you have the liquid cash to pay the one time tax bill and you have reasonable belief that the tax rates in your situation will not go down and most likely will go up even in your retirement years -- you should give the matter serious consideration now that the law does not restrict high income earners from such conversions. 

Tip:  Generally, low income earners are not good prospects for Roth conversions

Having stated the two main considerations, you will still need to get a good handle on why, generally, converting to a Roth IRA may be a correct assumption for ALL Americans who retire with adequate and semi-high or high income (or having adequate income producing assets).  I say this because of the U.S. National Debt Clock.  When you review the numbers on this site, it may be a "guarantee" that taxes are not only going to go up...but possibly shoot through the roof for many of us! 

Note: Be sure to hit the "back" button afterwards to finish reading here!

U.S. National Debt Clock
 

The reason is simple.  If you feel the tax rates will go up next year and if you expect your 2009 adjusted gross income (AGI) to be under $100,000, (thus making you eligible right now), then a review may be in order.

For those currently eligible to convert to a Roth IRA right now, an attitude is growing that income tax rates are going higher soon and that certain deductions we have counted on for years may be going lower, or disappear all together!

Many savvy tax advisors are telling their clients that are thinking about a Roth conversion -- to consider an early start.  Many have already been systematically converting separate accounts (or creating separate accounts for annual conversions), if they previously earned less than the $100,000 AGI limit (married couple) per year.  Starting January 1st, 2010 everyone will be eligible.

There is a special IRS "deal" being made as well for those that convert in tax year (calendar year) 2010.  The "deal" is that only 1/2 of the taxable income will be reported the first year and the other 1/2 will be reported the second year! So, the IRS doesn't expect you to report the income on your 2010 return, but instead -- the first reporting of income starts in tax year 2011 and ends with the other half being reported on your 2012 tax return.

At first glance, this delay of paying your tax bill for a 2010 tax year Roth IRA conversion looks good.  Taxes on the proceeds could catch a very low tax rate on small conversion amounts or applying to those in a low tax brackets (notwithstanding the fact that the reporting of this extra income during conversion could increase your marginal tax rate). It would appear to be an honest and fair deal no doubt, especially if you can delay having to pay the tax bill.  Also, you can count on low income taxpayers getting more freebies in the future (guess who gets to pay for them?), so even though I stated low income earners are not good prospects for Roth conversions, there is nothing wrong for the procedure as long as they possess the "cash" to pay the tax bill whenever they choose to let it be due.  For them, allowing the stretch out payment plan may be best for them and for smaller conversions or partial conversions.

But, the current administration is looking to find money to pay for things never planned on when this law was actually passed a few years ago.  I find a real catch-22 in trying to guess just what your tax rates will be in the future.  But, if you are a high incomer earner (active or passive), it would be quite foolish to think your rates are going down!

For high income earners now eligible, I can only imagine that tax rate bracket "creep" may happen each year you wait to report and pay your taxes on your Roth IRA conversion amounts.  So common sense and partial conversions may be smart... waiting to see what happens.  And in some cases, doing the whole works and reporting all of  it on your 2010 tax return (don't forget to amend your estimated payments) may also make sense.  That is if you have the cash handy to pay the bill and a strong desire to receive tax free income thereafter or pass that privilege on to your children or other heirs. 

There is provision in the code to report the income all in one year.  The only way to know which is best for you and your tax situation is to project the future in special software that can determine your best option.  For a small fee, you can use that service with our firm so you can make sound decisions and act only after you have reviewed the true costs to convert or not convert.  To report income in one year or delay for a year or two as the IRS wants you to do.  And, to consider how much of your IRA funds should be converted based on the facts at hand. You can get the information you need from us quickly so your decision will be sound!