To Convert or Not Convert?

For many months, the opportunity for any taxpayer to convert their IRA, SEP, SIMPLE IRA, and qualified plan amounts into a Roth IRA has been highly publicized and widely ballyhooed. So, I’m sure many of you find yourselves in the position of asking that very questions we pose above…To Convert or Not? Over the next few weeks, we are going to discuss a number of different angles surrounding this decision and try to provide you with as much information as possible to help you make that decision. However, this decision should not be made lightly and without careful consideration and planning. We highly recommend you consult your CPA, Financial Planner, and Investment Advisor before proceeding.

Before jumping into the details, I think it is important to highlight that many of the items that need to be weighed when making this decision are assumptions and/or questions that we don’t have the answers for: Will tax rates go up? What will market conditions be like? Will I be in a higher or lower tax bracket when I retire? Nobody knows the absolute answer to these questions; educated guesses can be made, but bear in mind that you are making a choice her on an educated opinion and that your final results may vary depending on what the future holds.

The Basics:

The reason this conversion opportunity has gained such wide spread publicity is that prior to 2010 the ability to convert was limited to individuals with Modified Adjusted Gross Income of under $100,000. That limitation has now been lifted, opening up the conversion opportunity up to any taxpayer (exceptions still may apply). Further, unless a taxpayer elects otherwise, then no gross income will be recognized from the conversion in 2010. Rather, it will be spread evenly across 2011 and 2012. This unique “tax liability spread” feature is only for 2010. After 2010, the taxes will all be in paid in full for the year the conversion is made.

Factors to Consider

The rules are pretty simple, but the decision is very complicated. The reason behind that are the various factors that come into play and the unknown aspect of those factors. Some important things to consider are as follows:


• Will I be in a higher or lower tax bracket when I retire?
• Where will I pay the taxes that result from my conversion?
• What are my goals with these funds? Will I need them for Retirement or do I want to leave the funds
to family?
• Will this affect my Social Security position at Retirement?
• What if I’m not sure? Where do I go for help?

These factors will each play an important role in your decision. Some may weigh certain factors higher than others, but it is certain that they should all be analyzed before moving forward with your decision to convert or not. Join us next as we will move into analyzing these factors and how they might work into your own situation. Until then, April 15th is approaching quickly, round up your tax materials and visit your local CPA.

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