Roth Conversions

Judi Martindale

February 17, 2010

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Most of us have come to realize that we need to invest for our retirement. The days of company-paid pensions are long are gone for the most part. Knowing that, the government has introduced some new incentives to make saving for retirement more attractive. Consequently, there has been a great deal of buzz in the news lately about Roth conversions and with good reason.

Beginning this year, the law allows all traditional Individual Retirement Account (IRA) owners to convert their IRA to a Roth IRA without income limits or marriage status requirements. Furthermore the income taxes due on the money may be paid in 2010 or split between 2011 and 2012. As you may know, once the account is converted to a Roth IRA you pay no income taxes in future years. It sounds great and many investors are making the conversion but there are additional factors to analyze and evaluate before you decide to make the change.

In one of my trade publications, Investment News, author Andrew D. Rice offers some additional considerations.

Inherent in the rush to transfer assets from an IRA to a Roth IRA is that assumption that tax rates will be higher in the future and that Roth tax laws will not change. Historically the tax rates have changed 26 times in the past 100 years and the marginal tax rate has ranged from 7% to 94%. While it is true that tax rates might increase during your lifetime, but they may decrease as well.

Furthermore, you’re actually leveraging your money by using money that you will eventually pay taxes on. In other words, if you postpone taxes, you now have more money invested that is earning returns. Over time, your investment could earn more than the tax cost. In other words, would you rather have the investing power of an IRA worth $500,000 for example or a Roth IRA worth $375,000?

There are other factors to consider as well. If your estate plan includes leaving money to charity, you (and the charity) would be better off leaving your money in an IRA since charities have tax-exempt status. Without the conversation, the charity would receive more.

Perhaps the major reason to keep your IRA as it is rather than convert it to a Roth IRA is your potential future medical expenses, long-term care or assisted-living coverage. While the money from the IRA would be taxable, the deductions allowed for medical expenses could significantly reduce the amount of income due.

A fellow financial advisor shares this example: “I have an elderly client who was forced to move into a long-term-care facility. I had to ramp up his income withdrawals to pay for his costs as well as his other needs. I recommended that we make all of his income withdrawals from his IRA. Previously his income came from both IRA and non-qualified assets in order to manage his total tax situation better.

“My reason for changing all his income withdraws to his IRA was due to the known future medical expenses he would have at the care facility. I was able to arrange for him to use tax-deferred money (IRA) instead of after-tax money (Roth IRA) to pay for those expenses. The actual medical deductions resulting in his paying were roughly just 2% in taxes on all of his income.

“The advantages that the client and his family continue to realize from designating his income source as an IRA instead of a Roth are immeasurable. He got the benefit of contributing to the IRA at a 25% tax rate and now he’s paying an effective 2% tax rate. That’s a 23% tax savings for the client not counting the IRA’s earning over the last 25 years.”

The issue of whether or not to convert your IRA or a Roth IRA is not as black and while as many would have you believe. As described, there are a number of factors to consider including future tax rates, potential changes in the existing laws concerning Roth IRAs, charitable contributions and future health care costs.

Unfortunately, many of the reasons financial advisors are recommending converting an IRA to a Roth IRA are sales driven. If you decide to convert, make the decision based on your own research or the advice of a trusted, fee-only advisor.

Please send me your comments and insight: [email protected]

Judi Martindale, (, a certified financial planner as well as a certified coach and author, was named as one of American's top 250 financial planners for three years in a row by Worth magazine. She specializes in working with women's concerns all over the country.

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