Should I Convert?

I’ve been hearing and seeing a lot about “Roth IRA conversions” recently. I think taxes will be increasing in a year or so, and am thinking about converting my traditional IRA to a Roth IRA now, so I can take tax-free distributions when I retire in about 7 years. My taxable income this year will be approximately $110,000 and I am currently age 61. My questions are: 1) am I too old to think about an IRA conversion and 2) should I think about “converting” my IRA this year or wait until next year?

Fred from Milwaukee, WI

Answer

Fred: Your thinking about taxes increasing in a couple of year unfortunately is probably pretty accurate and given your time horizon for needing to access your IRA, a conversion to a Roth IRA is probably a good idea for you. However, you will not be able to convert to a Roth IRA this year (2009), because you cannot qualify for the conversion since your income is over $100,000. However, beginning next year, 2010, anyone will be able to convert to a Roth IRA regardless of income or filing status. As you are making the decision whether or not to convert to a Roth IRA, keep the following factors in mind:

1. The tax bracket you anticipate being in after you retire – the higher you think your tax bracket will be, the more you will benefit from the conversion.
   
2. Whether or not you have funds set aside to pay the income taxes when you convert. Remember the amount you convert will be added to your income in the year you convert, and you should always pay the taxes due from non-IRA funds. The advantage of converting in 2010 is that you will be able to spread the taxes due on the converted amount over 2 years, the 2011 and 2012 tax years.
   
3. The time horizon before you will need to access the IRA funds. Since you do not plan to use your IRA during the next 7 years and you are over age 59 1/2, you are in a good position for a conversion.