Is a Roth IRA conversion in your future?

Q: A friend mentioned to me something about IRA conversion rules changing for 2010 and, honestly, I have no idea what she was talking about. Can you help?

A: I’m happy to help. And your friend is correct: 2010 may be a good year for many of us to revisit our IRA accounts to see if a conversion makes sense.

Up until now, retirement investors who wanted to convert monies in a traditional IRA to a Roth IRA could only do so if their modified adjusted gross income was $100,000 or less. Beginning in 2010, this restriction will be removed, permitting retirement investors at any income level to move assets in a traditional IRA over to a Roth IRA.

As an additional incentive, the IRS is allowing those who convert in 2010 to spread the federal income tax owed on the converted sum over two years, a provision designed to lessen the immediate tax bite.

To convert or not to convert?

The answer to this question will differ for every investor, depending on a number of factors including the amount of time you plan to leave the money invested, your estate-planning objectives and your willingness to pay the federal income-tax bill that a conversion will trigger. Here is a look at the potential benefits and drawbacks of converting.

Potential benefits …

— A larger sum to bequeath to heirs. Since required minimum distributions do not apply for Roth IRAs as they do for traditional IRAs, investors who do not need the money may leave it invested as long as they choose, which may result in a larger balance for heirs. After an account-owner’s death, beneficiaries are required to take distributions, although different rules apply for spouses as opposed to children and other non-spousal beneficiaries such as life partners.

— Tax-free withdrawals on qualified distributions. Withdrawals from a Roth IRA are tax-free for those who have had the money invested for five years or more and have reached the age of 59-1/2 or have attained another qualifying event.*

… and drawbacks

— The tax bite. Investors who convert assets from a traditional IRA to a Roth IRA are required to pay taxes on the amount that is rolled over. The full amount of the conversion is usually taxable at ordinary income-tax rates. If you have a nondeductible traditional IRA (i.e., your contributions did not qualify for a tax deduction because your income was not within the parameters established by the IRS), investment earnings will be taxed but the amount of your contributions will not. The conversion will not trigger the 10-percent penalty for early withdrawals.

Which is right for you?

If you have a traditional IRA and are considering converting to a Roth IRA, here are a few factors to consider:

— A conversion may be more attractive the further you are from retirement. The longer your earnings can grow, the more time you have to compensate for the associated tax bill.

— Your current and future tax brackets will affect which IRA is best for you. If you expect to be in a lower tax bracket during retirement, sticking with a traditional IRA could be the best option because your required minimum distributions during retirement will be taxed at a correspondingly lower rate than amounts converted today. On the other hand, if you anticipate being in a higher tax bracket, the ability to take tax-free distributions from a Roth IRA could be an attractive benefit.

There is no easy answer to the question: “Should I convert my traditional IRA to a Roth IRA?” As with any major financial consideration, careful consultation with a professional is a good idea before you make your choice.

*IRA account holders (both traditional and Roth) may make qualified withdrawals before age 59-1/2 only if they meet specific criteria established by the IRS (disability, qualified first-time home buyer and others). Consult for additional information.

Jeremy Gussick is a financial consultant with LPL Financial, the nation’s largest independent wealth management firm,* and specializes in the financial planning needs of the LGBT community. He is active with several LGBT organizations in the Philadelphia region, including the Delaware Valley Legacy Fund, the Greater Philadelphia Professional Network and the Independence Business Alliance. OutMoney appears monthly. If you have a question, contact him at [email protected].

This article was prepared with the assistance of Standard & Poor’s Financial Communications and is not intended to provide specific investment advice or recommendations for any individual. Consult your financial advisor or Jeremy Gussick if you have any questions. LPL Financial, Member FINRA/SIPC. *Based on total revenues, as reported in Financial Planning Magazine, June 1996-2009.

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Jeremy R. Gussick is a Certified Financial Planner™ professional affiliated with LPL Financial, the nation’s largest independent broker-dealer.* Jeremy specializes in the financial planning and retirement income needs of the LGBTQ+ community and was recently named a 2023 FIVE STAR Wealth Manager as mentioned in Philadelphia Magazine.** He is active with several LGBTQ+ organizations in the Philadelphia region, including DVLF (Delaware Valley Legacy Fund) and the Independence Business Alliance (IBA), the Philadelphia Region’s LGBT Chamber of Commerce. OutMoney appears monthly. If you have a question for Jeremy, you can contact him via email at [email protected].