To Convert or Not to Convert – Roth conversion is the question
To Convert or Not to Convert – Roth conversion is the question

To Convert or Not to Convert – Roth conversion is the question

Roth conversion, converting from a traditional to a Roth IRA, can be a very attractive prospect when the market is down.  You can move your balance to the Roth IRA while the taxable amount is lower and then let them grow in the Roth account tax-free.  The ban on conversions by high income earners – the rule that those with AGIs over $100,000 aren’t permitted to switch to a Roth – won’t apply after this year.

If you plan to convert an Traditional IRA to a Roth, you may want to wait until 2010.  The IRS is implementing a new rule that will soften the tax blow from making the conversion.  The tax on 2010 conversions can be deferred and spread out over two years. In other words, you can have 50% of the conversion income taxed in 2011 and the rest in 2012.

For top bracket fillers, things are a little more complicated.  If you convert in 2010, you may want to pay the tax on the conversion up front. With the top rate likely to go from 35% to 39.6% after 2010, the conversion income would create a larger tax burden if you spread the tax out over 2011 and 2012.

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