Monday, June 14, 2010

Why You Shouldn't Convert to a Roth IRA

From the Wall Street Journal:

As 2009 came to a close, financial advisers geared up for an expected flood of clients looking to convert their traditional individual retirement accounts to Roth IRAs this year.

Conversions are indeed way up from previous years, thanks to the elimination of the income limit for those wanting to make the switch. But many clients who had expressed interest are deciding not to convert.

Conversion is attractive mainly because withdrawals from Roth IRAs, unlike those from traditional IRAs, are tax-free.

Moreover, Roth IRAs also have no withdrawal requirements; traditional IRAs require investors to begin making withdrawals at age 59½. Several brokerage firms saw conversions by their clients quadruple in the first quarter of 2010, compared with the year-earlier quarter.

However, financial advisers are finding that most clients wouldn't benefit, on balance, from a conversion. Here are the main reasons why:

1. The tax bite is too big.

Clients often come to advisers asking about the Roth IRA conversion opportunity without realizing the immediate tax implications: They will have to pay income tax on any money they move out of a traditional IRA into a Roth account.

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