6 Factors in Favor of Converting to a Roth IRA

Barbara Marquand | guest writer for GoTalkMoney

This year you can convert a traditional IRA or a 401(k) from a former employer to a Roth IRA, even if you make big bucks. Previously reserved for taxpayers who make less than $100,000 a year, conversions to Roth IRAs are open to everybody now, thanks to a lifting of income restrictions.

Conversion is not the right move for everybody. Typically Roth IRAs are good for people in their early earning years, who have a long way to go before retirement. Yet conversion still might be a consideration, even if you're well into your career. Here are 6 reasons conversion might make sense in 2010.

1. Tax Payment Spread

You face a tax bill when you convert a traditional IRA to a Roth because of the way the two types of accounts are structured. Traditional IRAs let you claim tax deductions for the money you sock away in the account. You pay taxes on the contributions and earnings upon withdrawal in retirement. You don't get a tax deduction on contributions you make to a Roth. Instead, those after-tax contributions are allowed to grow tax free, and you pay no taxes when you withdraw in retirement.

The IRS lets you spread the tax bill for a conversion this year over 2011 and 2012. For any conversions after 2010, though, you must pay the taxes owed all in one year.

2. The Tough Market

The stock market plunge two years ago thrashed retirement accounts, and many are still recovering. Now might be a good time to convert while your retirement account value is relatively low. You'll owe more taxes if you let the account grow before converting.

3. Your Future Tax Rates

In general financial planners say investors should consider the Roth IRA if they believe they'll pay higher tax rates once they're eligible for distributions. You could pay higher tax rates than now if you retire at a relatively young age and need to make hefty withdrawals to support an active lifestyle, for instance. In most cases you should probably stick with a traditional IRA if you think you'll be in a lower tax bracket when you're getting distributions.

4. Estate Planning Flexibility

Roth IRAs offer more distribution flexibility than traditional IRAs, a key benefit for estate planning. Traditional IRAs require minimum distributions starting at 70 1/2. You must take the money and pay taxes on it whether you need or it not. But Roth IRAs have no minimum distribution levels, so you only take out the money you need. This allows you to leave more money in your account for your beneficiaries to collect tax-free after your death.

5. Flexibility for Investments

Considering a conversion from a former employer's 401(k)? The Roth IRA offers more flexibility than a 401(k), allowing investments in just about anything--stocks, mutual funds, money market accounts, certificates of deposit, even real estate.

6. You Can Change Your Mind

Tax rules let you change your mind, called a "recharacterization," if you convert to a Roth and then decide you'd like to go back to a traditional IRA. You have until Oct. 15, 2011 to reverse a conversion made this year.

Only you and your financial advisers can decide whether conversion is a good idea. Get help from your accountant or the custodian of your IRA if you're confused.

Disclaimer:This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

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