If your traditional IRA has dropped in value and you expect higher federal income tax rates in future years, now might be a very good time to consider converting all or part of your traditional IRA balance into a Roth IRA. If you convert, it will trigger a current tax hit on the amount you convert. But, with your traditional IRA balance at a depressed level (and possibly your overall income too), the tax hit will be less. After the conversion, your new Roth IRA balance can build up federal-income-tax-free.E ventually you can take tax-free withdrawals after age 59½ when your marginal tax rate may be higher (perhaps much higher) than it is right now.

Roth Conversion Basics
A Roth conversion is treated as a taxable distribution from your traditional IRA because you are deemed to receive a taxable payout from your traditional IRA with the money then going into the new Roth account. So, a conversion will generally trigger a current federal income tax bill (and maybe a state income tax bill too). But the following positive factors may outweigh the current tax hit.

• The conversion hit is reduced if the value of your traditional IRA has been beaten down by stock market losses.


• Today’s tax rates might be the lowest we’ll see for many years.  If so, converting would allow you to avoid higher future federal income tax rates on the entire post-conversion increase in the value of your Roth account.

The Roth conversion privilege was not available to everyone in prior years as it was only available if modified adjusted gross income (not including any additional income triggered by the conversion itself) was $100,000 or less.

For 2010, the $100,000 restriction disappears, which will allow all individuals to take advantage of the Roth conversion strategy no matter how high their income. If your income level prevented a Roth conversion in prior years, you can do one in 2010.

You Can Reverse an Ill-advised Roth Conversion
Another great thing about the Roth conversion strategy is you can always change your mind well after the fact. You have until October 15 of the year following the conversion year to recharacterize (unwind) your converted account (or accounts). For example, say you convert your traditional IRA into a Roth IRA in early 2010. Later next year, the value of the converted account plummets due to poor performance of the investments held in the account. In this bleak scenario, you would pay 2010 income tax on the value that later disappeared. You have until October 15, 2011 to recharacterize the converted account back to traditional IRA status. It’s as if the ill-advised conversion never happened. So, you won’t owe any 2010 income tax on the now-unwound conversion.

Conclusion
Low current tax cost for converting plus the chance to avoid higher future tax rates on income and gains that will accumulate in your Roth IRA as the economy recovers (we hope) may make a Roth conversion beneficial for you. There are a number of variables to consider, and we have prepared a checklist which should make it easier for you to determine if a Roth conversion is right for you. We would welcome the opportunity to work with you to ensure a well-informed and thoughtful decision.

Complete the Roth IRA Conversion Checklist to determine whether you may benefit from a Roth IRA conversion.

For more information, please contact:
Madeline T. Janowski, Director
215-564-1900 | info@asherco.com

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