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Is a Roth conversion right for you?

Posted by Cheryl Costa  September 3, 2009 10:51 AM

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In the past, people with Modified Adjusted Gross Income (MAGI) of $100,000 or more have been prevented from converting their traditional IRA to a Roth IRA and many of these people are looking forward to 2010 when the income limitation is lifted. But does it make sense for people earning significantly more than $100,000 to convert in 2010? Maybe, and maybe not.

The general rule of thumb is that a conversion makes sense if you can pay the taxes owed on the converted amount with taxable (non-IRA) funds and you expect to be in the same or a higher tax bracket once you retire. If your tax bracket will be lower when you retire, you might want to pass on the opportunity to convert.

That means that a conversion may not actually be beneficial for those higher income individuals who are anxiously looking foward to doing a conversion in 2010. For example, people with taxable incomes higher than $209,000 in 2009 are already in the 33% marginal tax bracket. Those with taxable incomes exceeding $373,000 are already in the 35% marginal tax bracket. It is very possible that these individuals may find themselves in a lower tax bracket once they are retired.

It is important to note that the income limitation is lifted for 2010 and subsequent years so there is no particular reason to rush to convert in 2010. The only thing "special" about 2010 is that if you convert in that year, half of the income can be reported in 2011 and the other half in 2012. The delay gives you the opportunity to set aside funds to pay the taxes. (That being said, it is also very likely that tax rates will be higher in those years, so it might make sense to pay the taxes in 2010 anyway.)

The take-away here is that the Roth conversion decision varies person to person and you really need to carefully evaluate your personal circumstances and financial objectives. For example, even people in relatively high income tax brackets may want to convert some of their traditional IRA because doing so has estate planning benefits.

This blog is not written or edited by or the Boston Globe.
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Local finance professionals share insights and advice on issues such as budgeting, managing debt, and retirement planning.

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D. Abraham Ringer is a CERTIFIED FINANCIAL PLANNER practitioner and a Financial Adviser with Morgan Stanley Global Wealth Management in Boston. He is registered in MA, NH, NY and several other states to which his articles are directed. For more information please visit
Financial Planning Association™ of Massachusetts has 900 members who specialize in the financial planning process. Many of its members engage in philanthropic pro bono work in their communities, recommend legislation, elevate public awareness, promote financial literacy, and advocate for sound economic and tax policies.
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