Roth Conversion: In-Depth Analysis

January 28, 2010

Money-Guy 01-28-2010

Well here it is; we finally did it. You have been writing, calling, and asking for us to explain and go through the nuts and bolts of the Roth conversion and why 2010 is such an important year. You can’t really turn on any financial media or read any financial literature and not come across something that at least mentions or alludes to the this planning opportunity.

So what is so different about the year 2010? Well, there are actually two big differences:

  1. Anyone can do it no matter what their income.
  2. The taxes resulting from a Roth conversion made in 2010 can be deferred over the following two years (2011 and 2012).

Why would you want to have money in a Roth IRA? With a Roth, contributions are made with after-tax money. Simply put, there is no immediate tax benefit from putting money into a Roth IRA. However, that money is allowed to grow tax-free and withdrawals in retirement are tax-free as well assuming certain conditions are met. Not only this, but there are also no Required Minimum Distributions associated with Roth IRAs when you reach age 70 and a half.

As you listen to the show, I will walk through the ins and outs of the process, who it makes sense for, and also who it does not make sense for. As a summary, if any of the following describe you, then you may be a good candidate for the conversion:

  • You can convert at low or no cost
  • Your taxable income is likely to be higher in retirement
  • You anticipate higher tax rates during your withdrawal period
  • You can defer Roth balances past when Required Minimum Distributions are scheduled to begin
  • You seek to potentially maximize after-tax dollars passed to heirs
  • You have outside cash to pay any additional taxes.

I also explain our analysis on how we make the determination for our wealth management clients of whether to convert or not, and, if so, how much they should convert. Hopefully as you listen, you will recognize the questions you should ask and the thoughts you should have to determine if this is a planning opportunity you should take advantage of.

You will also hear me share some listener emails in the show today. This show is produced for you, the listeners, and you have no idea how much we value your comments and feedback! Please keep them coming so that we can provide you with the content you want to hear.

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