In 2010, income and filing status restrictions have been lifted to allow anyone to convert a Traditional IRA into a Roth IRA. Converting to a Roth IRA means that while you’ll pay taxes on pretax contributions and earnings now, withdrawals made from your Roth in retirement will be tax-free.
Even better, Roth IRAs do not have required minimum distributions like Traditional IRAs, making them useful for estate planning or as a long-term tax-deferred savings vehicle.
Consider the following before converting:
MARKET VALUE OF YOUR IRA If you’ve experienced significant losses in your retirement account, now might be a good time to consider converting. You will be paying taxes on a smaller amount of money, and as the market hopefully improves, you can enjoy your tax-free ride.
TIME PERIOD In general, the longer you plan to keep money in your Roth, the more beneficial it becomes to convert. There are calculators online to illustrate “break-even points” of a conversion, or ask a tax advisor to assist you.
TAX BRACKET If you believe you are in a lower tax bracket now than you will be at retirement, it could make sense to pay taxes now rather than later.
DIVERSIFICATION It could be advantageous to hold various types of retirement plans, such as both pretax and posttax accounts.