To convert or not to convert – that is the question many investors are asking themselves as 2010 approaches.
Beginning Jan. 1, traditional IRA owners will have the opportunity to convert their investment into a Roth IRA, a form of IRA in which the contributions are not dedicated for income tax purposes, but the withdrawals are tax-free.
Unless Congress passes legislation to alter the current law before the end of the calendar year, the potential for Roth IRA conversions in 2010 is vast.
Roth IRA conversions are not new. However, until now only taxpayers whose income was less than $100,000 were eligible to convert traditional IRAs to Roth IRAs.
David Martin is sold on the conversion to Roth, but with a caveat. A senior vice-president with Trustmark Wealth Management in Jackson, Martin says converting is not for every investor.
“If you need your IRA to maintain your standard of living, it’s not a good thing to convert,” he said. “The people who should consider conversion to a Roth are those that are using their investments only as a wealth transfer tool for their children.”
While a few money management firms are pushing the conversions as a slam dunk, some experts say that investors should proceed with caution.
“Roth IRAs are a bad deal for taxpayers because they are paying taxes now in order to avoid paying taxes on distributions that are taken later,” said Jeff Nabers, CEO of Nabers Group, a Denver-based financial planning firm. “The problem is partly the economic crisis we are in.”
Nabers says converting to Roth IRAs makes sense in a commodity-based monetary system but believes the time is not right in an economy fright with uncertainty.
“We have a flat currency system that creates an inflationary environment in which Roth conversion is a good idea for the government and a not-so-good deal for the average tax-paying citizen,” he said.
To determine whether a conversion would benefit you, consider the differences between traditional IRAs and Roth IRAs. Contributions to traditional IRAs are tax-deductible, within certain limits, during the year the contribution is made. Income is taxable when funds are withdrawn from the traditional IRA.
For some, conversion is extremely beneficial, says Martin.
“For example, a retired man named Harry has sufficient assets and only takes the required minimum distributions from his IRA has little or no practical use for a traditional IRA,” he said. “Let’s say Harry has a daughter who is a physician and his sole beneficiary. Assuming she will inherit the IRA, she would have to take the required minimum distribution at a higher tax rate after her father’s death,” if Harry didn’t convert to a Roth IRA.
After the conversion, Harry wouldn’t have to take any required minimum distributions from his Roth IRA, said Martin.
For many people, Roth IRAs offer a better opportunity than traditional IRAs, Martin says. Funds are contributed on an after-tax basis, but they can grow on a tax-free basis, and taxes will never be due on Roth earnings, as long as the assets are held in the Roth IRA for at least five years.
Some investors are planning to ease into the Roth IRA plan, said Martin.
“One of my customers has informed me that he wishes to convert a 33 percent portion of his traditional IRA to a Roth,” he said. “It doesn’t have to be all or nothing.”
Nabers points out that the most important thing that taxpaying investors can do in these economic times is to find alternative investment solutions. He advises that people seek alternatives to volatile Wall Street securities and “dollar-denominated assets” in general.
“I recommend that people get more educated on money matters and look at both sides of the story before making a decision,” he said. “Before paying taxes using half of your savings, wealth or retirement account, consult experts about all of your options.
“What you don’t know could hurt you, and deciding to convert to a Roth IRA could cost you hundreds of thousands of dollars,” if not without proper research.
“(Conversion) is certainly not good for everybody,” he said. “You have to look at your individual (financial) circumstances.”
BEFORE YOU GO…
… we’d like to ask for your support. More people are reading the Mississippi Business Journal than ever before, but advertising revenues for all conventional media are falling fast. Unlike many, we do not use a pay wall, because we want to continue providing Mississippi’s most comprehensive business news each and every day. But that takes time, money and hard work. We do it because it is important to us … and equally important to you, if you value the flow of trustworthy news and information which have always kept America strong and free for more than 200 years.
If those who read our content will help fund it, we can continue to bring you the very best in news and information. Please consider joining us as a valued member, or if you prefer, make a one-time contribution.Click for more info