 Converting to a Roth IRA
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 Dear
Tax Talk,
When is it wise to convert traditional IRAs to Roth IRAs? I am retired
and do some estate planning. Converting now will put me into the
25 percent tax bracket, but I will also be in the 25 percent bracket
when I start taking RMDs (required minimum distributions). My question
is: Is it wise to pay tax now and pass tax-free Roth IRAs on to
my children? Or when is it wise to convert IRAs to Roths?
-- Ernie
 Dear
Ernie,
I am never a fan of paying more tax on purpose. The Roth conversion is an oddity as it exists to make people pay more tax now in exchange for a future promise that you will not have to pay tax. Of course, the tax laws are always changing and that promise, while currently the case, may be modified in the future.
A Roth IRA conversion involves rolling money out of
a traditional IRA into a Roth IRA and including the transfer in
your income for the year. Your adjusted gross income must be less
than $100,000 for the year of transfer -- which is a good thing;
otherwise you may pay too much tax.
Hence, the transfer makes sense in a year in which
you don't have any income and may lose deductions otherwise. It
might also makes sense in a year when your marginal rate will be
less than the rate in the year when you are required to take minimum
distributions (i.e., after age 70½). You say that you are
not in a lower rate currently, but if you could move some investments
around so that in a year or so you fall into a lower rate, it may
be worth revisiting the conversion.
The Internet is loaded with information and calculators for determining when it may make sense to convert to a Roth IRA. I suggest you look around a little bit and also sit down with a good estate planner for some personal attention.
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