AARP The Magazine - March/April 2010

::::::::::::: Personal Finance :::::::::::::

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Should you convert your traditional IR
o a Roth IRA? New tax breaks make
this appealing—but only if you answer
yes to our three key questions
t

By LYNN BRENNER

those years will turn out to be higher.
While deciding on the wisdom of
a Roth retirement account can get
complicated, its main selling point is
simple: if you follow the rules (see page
40), your withdrawals will be tax free.
With a traditional IRA, by contrast,
you pay no income tax on amounts you
contribute, but your withdrawals in
retirement will be taxable. In effect, the
government is your silent partner in
a traditional account, its stake in your
money growing along with yours. By
converting a traditional IRA to a Roth,
you buy out that partner and become
the sole owner of your nest egg: all its
future growth will belong to you.
Some financial gurus believe that
It works like this: if you withdraw
money from your IRA to transfer it to
a Roth in 2010, you can choose to pay
the income taxes on that withdrawal
over two years, with the tax returns
you’ll file for 2011 and 2012. Postpon-
ing payment blunts the immediate
cost of conversion but carries its own
risk—that your income tax rates for
If your banker, broker, or tax adviser hasn’t yet pitched you
on moving money from your individual retirement account to
a Roth IRA, expect a call. As of January 1, anyone, regardless of
income, can transfer funds from a traditional IRA, whose with-
drawals are taxed, to a Roth, whose withdrawals aren’t. A lot
of financial pros are eager (maybe too eager) for you to switch,
and the government has chipped in with a one-time incentive.

Roth conversions are a particularly good opportunity now. Their reasoning is that although taxes may feel high, today’s tax rates are historically low, and the government will probably be forced to raise revenue to meet payments on the national debt. “These are the lowest rates most people will see for the rest of their lives,” asserts Ed Slott, a Rockville Centre, New York, IRA expert best known for dispensing financial advice on PBS shows such as Stay Rich Forever and Ever.