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 for 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, but if their income is going up in their profession, converting to Roth early when rates are lower does make sense.

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 and YOU will be affected by the increases with income (working or retirement), a proper review may be in order. With some number crunching, you can reasonably model the future tax environment with different scenarios of rate of return, rate of inflation, and the assumed tax rates.

Since the cap has been removed and all taxpayers can now convert, regardless of having a high AGI (Adjusted Gross Income) over $100,000, a free study is encouraged if you are curious. Especially since the attitude is growing that tax rates will be going up soon. (The Bush cuts expiration 12/31/2012 automatically raise your tax bracket!) And just as bad,  certain deductions we have counted on for years may be going lower, or disappear completely! Don't tell your kids or grandkids to buy a house for the "tax deduction" like you may have done once. There is no guarantee it will continue on as a credible write off. And, with lowered home values, much of the current interest paid on mortgages isn't really helpful on a tax return with the standard deduction being quite high.

Many savvy tax advisors have been telling their clients to systematically convert separate accounts (or creating separate accounts for annual conversions), if they previously earned less than the $100,000 AGI limit (married couple) cap that was lifted January 1st, 2010.

There was a special IRS "deal" for those that converted in tax year (calendar year) 2010.  The "deal" was that only 1/2 of the taxable income will be deferred and reported as 2011 income and the other 1/2 as 2012 income. This delay of actual income reporting was a hard decision for some who felt tax rates are going to scoot up in 2012. For those folks, they had the option to report all the income in 2010 and be done with it. The problem with many investors holding converted IRA assets in new Roth accounts was that the values kept moving all over the page the past few years. Recharacterization was available (a few extensions for certain situations still exists) until October 17th, 2011. If YOUR new Roth IRA from 2010 was not converted back to a traditional IRA - it is a set taxable event no matter which option you use to report the income.

It's true, the current administration is looking to find money to pay for things never planned on. Such as interest on massive U.S. debt. 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 full or partial conversions may be smart... knowing you always have until the tax extension filing deadline the following year, to change your mind and cancel the taxable event instantly! Just be sure you have the cash handy to pay the tax bill.

As said before, 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.  For 2012 tax year conversions, we can give you all your options and let you see what the future may look like by converting taxable money into tax free money. To make a sound decision, using a professional IRA advisor makes a lot of sense. If we don't give you a "first opinion", consider using us for a "second opinion" before committing to any proposal.

What About Recharacterization Options?