Thursday, December 24, 2009

Roth IRA Conversions - More Questions and Likely Candidates for Conversion

Other questions:
  1. Most calculations don't include the effect of state income taxes;
  2. Social security benefits could be cut. For example, beneficiaries under full retirement age have $1 in benefits deducted for each $2 earned above an annual limit. That limit in 2009 is $14,160. A large conversion to a Roth could push incomes well above the Social Security limit.
For certain investors the conversion does seem to make sense. For example, for estate planning, an IRA owner with a large balance may wish to convert to a Roth, and pay the taxes out of other funds. This reduces the taxable estate, and gives his heirs a tax-free "gift" since they would inherit a Roth IRA on which taxes have already been paid.

Another situation could be an IRA owner who has a fairly aggressive investment portfolio with concentrated positions in one or two holdings. In this case, the owner could set up two Roth IRA's, and convert. Someone who converts has until October 15, 2011, to decide whether to recharacterize their new Roth IRA's back to traditional IRA's. If one of the Roth IRA investments soar in value, and the other goes lower, the owner keeps the one Roth IRA with the appreciated asset, and switches the other one back to the traditional IRA. Of course, the owner still has to pay estimated taxes along the way, but these could be recovered when the final taxes are filed.