The big news this year is Roth Conversions. For 2010, there are no income limitations for a person to convert their regular IRA to a Roth. The question is, ‘Should you do it?’ That demands a typical lawyer’s answer…..It depends.
Why is the Roth so attractive? The Roth IRA is the only vehicle which allows for tax free growth along with tax free distributions when you retire. There are no mandatory withdrawals when you turn 70 ½ as there are under traditional IRA’s currently. Certainly for those who have a long investment horizon before they retire, considerations should be given to this option.
For older folks, it may make sense to employ this option if you are trying to reduce the size of your estate for estate tax purposes. This can be especially significant if the estate tax rules change as they are expected to in the next couple of years.
Converting to a Roth this year does require you to pay the income tax on the conversion, but this may be the perfect time to engage this strategy. Since the economy has depressed asset values, they may be at their lowest, thus taxes to be paid would be low as well. Taxes to be paid can be split over two years and you have the right to undo the strategy by October 15, 2011 if it doesn’t work out. And in a time when it seems that everything generates a tax, having access to tax free money in the future could make a lot of sense.
One further point is worthy of note. By directing the beneficiary of the Roth to and IRA Dynasty trust, you can establish a source of tax free money for generations and protect the assets from your family’s creditors for years and years.
The Roth Conversion is not right for everyone, and maybe it doesn’t call for conversion of all your IRA assets, but at least you should talk with your CPA or investment advisor about whether it makes sense for you in whole or in part.