This could be a great time to convert to a Roth IRA

If you’ve ever considered converting a traditional, tax-deductible IRA into a Roth IRA for the latter's tax advantages, now could be the time to make your move.

Because the markets have fallen so dramatically, you will probably face a smaller tax bill now if you do a conversion than you would have before. If you convert, you must pay ordinary-income taxes on the money you switch over. You may also be able to turn a SEP-IRA or SIMPLE IRA into a Roth.

Roths have two big advantages. First, the money you withdraw isn’t taxed—neither the principal nor any growth—as long as you’ve kept it there for at least five years and you’re 59.5 or older. Second, you never have to take minimum distributions beginning at age 70.5, as you do with a traditional IRA.

What’s more, taxes, both Federal and state, may well go up in coming years. So paying taxes now could be smart—unless you think you will be in a much lower tax bracket when you begin withdrawing money.

To be eligible for a conversion, your modified adjusted gross income must be under $100,000 a year. Also, you cannot be married and filing singly—unless you lived apart from your spouse for the year.

If you decide to convert, instruct your mutual fund company or other trustee to change the registration on the account. Try to pay whatever tax you owe with money not in any retirement account.

The younger you are, the better the case for converting. The mutual fund giant Vanguard has this online worksheet that can help you decide. —Warren Boroson

Guest contributor Warren Boroson is the author of more than 20 books, including “How to Pick Stocks Like Warren Buffett” (J.K. Lasser).

Comments

[convert ira to roth]

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