One Time Special IRA Deal For You This Year Only
September 3, 2010 12:40 AM   Subscribe

2010-Only-IRA-Filter: Should I roll my Traditional IRA to a Roth IRA?

So 2010 is an extra-special year, IRA-wise. Apparently THIS YEAR ONLY you can roll a Traditional IRA to a Roth IRA and there is no income limit (unlike in previous years or next year).

Since my annual income was over the rollover limit for 2009 (and probably will be over the limit for 2011), I'm wondering if I should roll my Traditional IRA to a Roth.

My Traditional IRA has ~$50k in it and my Roth IRA has ~$13k in it.

I think the way it works this year is I can roll the $50k into my Roth and pay the taxes on the $50k over 2 years (half for my 2010 return and half for my 2011 return). Is the rollover taxed as regular income? Assuming the 28% bracket, will I have to pay ~$14k to do this?

Is this correct? Is this something that is a good idea to do? Have you done this?

As always, you are not my accountant and youre not giving me financial advice.
Thanks!
posted by Fiat124 to Work & Money (9 answers total) 4 users marked this as a favorite
 
Apparently THIS YEAR ONLY you can roll a Traditional IRA to a Roth IRA and there is no income limit (unlike in previous years or next year).

Actually the IRS says: "Conversions to Roth IRAs. Beginning in 2010, the modified AGI and filing status requirements for converting a traditional IRA to a Roth IRA are eliminated." Pub 590. OTOH, the split the taxes over two years is a special case for 2010.

Is the rollover taxed as regular income? Assuming the 28% bracket, will I have to pay ~$14k to do this?

I think it goes in box 15b on the 1040, which just gets added to your regular gross income. Although the tax forms aren't out yet for 2010 which would have the details on how you do the two-year split part.

Whether you should do the conversion, I will leave to others to answer.
posted by smackfu at 5:59 AM on September 3, 2010


The income is split over your 2011 and 2012 returns, not 2010 and 2011. Or you can pay taxes on the entire thing in 2010.
Also note that if you have more than one traditional IRA, the rollover only works as advertised if you roll over ALL your traditional IRAs. Otherwise there are special rules.
posted by phoenixy at 6:04 AM on September 3, 2010


No one here can really tell you if you should roll it over, but one really helpful thing to note is that the amount of time you have until you need to withdraw these funds is a huge factor in whether you should convert. If that time is short, it's unlikely that you'll earn enough benefit to offset the immediate tax concerns. If that time is long, you may actually do better by concentrating your efforts on future contributions to the Roth.
posted by advicepig at 6:53 AM on September 3, 2010


Best answer: There are a number of factors to balance, but in general the further you are from retirement, the more likely you are to be better off in a Roth. Additionally, the lower your current tax rate the better off you are likely to be to convert. I am in a higher tax bracket than I am likely to be in retirement and I have about 20 years until I would draw the money and for me it was clearly better to convert. The tax deferment made it easy.

If you Google your question, there are a lot of thoughtful articles on the web spelling out the pros and cons, including some calculators that you can plug your numbers into.

The one con that people don't often mention is that the key feature of the Roth IRA (not subjected to income tax when you take it out) could be changed at will by a future Congress and be means tested or restricted in some way. It may be unlikely, but it is a non-zero risk factor to consider.
posted by Lame_username at 8:33 AM on September 3, 2010


Best answer: I just converted mine into a Roth. I'm 29.

The general advice I've read in financial circles is that if you're in your 20s it's a no-brainer, if you're in your 30s is pretty close to a no-brainer, and if you're in your 40s and 50s it's much less clear. The logic is that you're going to pay taxes now on the gain in the account at a lower rate than you would be in the future (e.g. a traditional IRA you pay taxes when you withdraw in retirement; with Roth you pay taxes now and not when you retire).

The big reasons this is (most likely) true are:
* US tax rates are very low right now. With the huge debt we've got, and new expensive entitlement programs such as healthcare, they simply have to increase. If you're making enough to put money aside in an IRA, then odds are that you are one of those that is going to end up paying more taxes to support the system.
* You are likely going to be in a higher tax bracket later in life, including in retirement if you save correctly, due to higher income.
posted by kryptonik at 9:34 AM on September 3, 2010


Response by poster: @smackfu, I'd read through IRS Pub 590 and saw how they worded it, but Ive read on several financial websites that the income limit restriction was lifted for 2010 only and it would resume for 2011. I guess we'll know for sure when the IRS updates that pub for 2010/2011.

@pheonixy, You are correct; I meant pay half in CY2011 and half in CY2012. The actual conversion would go on my 2010 return which I would file in CY2011. This stuff hurts my head sometimes.

@advicepig, Lame_username and kryptonik, I'm in my mid-30s, so I have quite a way to go until retirement. I agree that the tax rates are at historic lows and even though I'm in a higher tax bracket now, the piper will have to be paid for the bailout, health care reform, etc so its probably a good idea to do it now.

I'm 99% sure I'm going to convert, but I always like to hear other peoples perspectives and thought processes on issues like this.

Thanks all for taking the time to reply. I will continue to monitor this thread in case anyone else would like to weigh in or add additional opinions.
posted by Fiat124 at 1:21 AM on September 4, 2010


Response by poster: And on a completely different note, is there a problem with answering people who reply to my question with the @username thing?

I thought I read somewhere its really annoying to some people when questioners do that (like I did above) and am curious why that is. Is there a better way to address particular mefites when I'm replying to their reply?

Sorry for derailing my own question.
posted by Fiat124 at 1:24 AM on September 4, 2010


And on a completely different note, is there a problem with answering people who reply to my question with the @username thing?

There's nothing objectively wrong with it but a lot of users don't like it for some reason. The site norm is to leave the @ out and just address people by username, e.g. "Fiat124, that was an interesting question you asked."
posted by phoenixy at 12:09 PM on September 8, 2010


One other thing to consider is what you would otherwise do with the money you need to pay taxes on the conversion.

Most of the sophisticated models of whether a conversion makes sense are comparing a Roth conversion that incurs, say $10,000 in tax to sticking with a traditional IRA and investing that $10,000 in a normal (not tax-sheltered) investment account which you don't touch until retirement.

If that's your choice, it's a really close call that depends a lot on predicting what the future will look like, and I wouldn't worry too much either way, although the above posts are good advice.

But it's possible this should be an easier decision for you:
  • If you'll get the money to pay the extra tax by spending less this year, and you won't otherwise save the money, you should do it!
  • If you'll get the money to pay the extra tax from the accounts themselves, it's a really bad idea.
  • If you aren't maxing out your IRA/401(k) contributions, it probably makes sense to put any extra money you can come up with into those, instead of into paying taxes on your Roth conversion.

    Even if you are comparing paying $10,000 in taxes for the conversion to saving an extra $10,000 for retirement, a little pop psychology can go a long way:
  • If you're not the kind of person who already keeps a separate account for retirement investments, or you aren't sure you'll be able to resist taking some money out of that account from time to time (for a down-payment, college tuition, etc.), a Roth conversion is probably a good idea because it forces you to save the money for your retirement.
  • Conversely, if you don't have some non-retirement savings, and might be forced to borrow from your 401(k) or take $ out of your IRA for unexpected expenses, it's probably better to hold off on the conversion and put the money in a normal investment account, because you can get at it if needed and won't have to dip into your other retirement savings.

    If after all that, you still think it's a close issue, you might think about it in terms of diversifying. I'm converting because I have a traditional 401(k) and converting will allow me to hedge my bets--I will have some tax-deferred money and some non-taxable money. That way, if it turns out to have been a great idea (high future taxes), or a terrible idea (the govt. means-tests Roth accounts), at least I'm not totally out of luck.

    Hopefully I said at least something helpful to you, and happy investing!

  • posted by _Silky_ at 6:12 PM on September 8, 2010


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