Is a Roth IRA Conversion right for you?

What is so special about a Roth IRA you might ask? Well it's the fact that qualified withdrawals (after the account has been in existence for five years and you are age 59 and 1/2) are tax free forever. It's a great tool for building tax-free retirement income and significantly growing family wealth through a Stretch IRA. The problem is that if you make too much money, you are not allowed to contribute to a Roth IRA. A Roth Conversion might be the answer.

A Roth conversion is when you convert your IRA balances (tradition, SEP, SIMPLE, etc.) to a Roth IRA by paying tax now so that all future growth can be withdrawn tax-free forever. A few considerations for the conversion are that tax rates now are low from a historical perspective. This means paying less tax now instead of paying much more in the future because you will be paying tax on all of the growth and the tax rates are likely to be higher in the future. 

Roth IRA funds do not have those pesky required minimum distributions (RMD's) at age 70 and 1/2. This means you can potentially let your Roth funds grow tax free for as long as you wish and then pass them to your beneficiaries income tax free who can then stretch distributions over their lifetimes. The Stretch allows you to keep your money tax deferred for the longest period possible so that your beneficiaries can continue to enjoy tax-free growth when you are gone.

The problem for those who make too much money to contribute to a Roth IRA, is they likely also make too much money to convert to one. So what's the point then? It just so happens that in 2010 along with the repeal of the estate tax for that year, the income restrictions on Roth Conversions are lifted and anyone regardless of income can do a Roth Conversion. To make the deal even sweeter, the tax due on the conversion is not due in 2010. Half the tax is due is 2011 and the other half in 2012.

To take advantage of this opportunity, you must do some planning. For example, for those who cannot make Roth contributions, may be able to make non-deductible IRA contributions. These non-deductible contributions can be made through 2010 and then converted to Roth IRA funds. The idea here is that the tax due on non-deductible contributions  would be minimal since the tax would only be due on the earning converted because the contributions have already been taxed.

There are several factors to consider when determining if a Roth Conversion is right for you and very specific rules to be followed to make sure it is done properly. For this reason, and many others, make sure you are working with an IRA specialist such as an Ed Slott Elite IRA Advisor. Elite IRA Advisors such as myself are specially trained in these as well as the myriad of other IRA issues that most advisors are not aware of. Feel free to contact me to discuss this strategy.

For more information on Elite IRA Advisors, visit www.irahelp.com.