Roth IRA- Time To Convert Your Traditional IRA’s and 401k’s?

time-to-convert-roth-ira
The 2010 Roth IRA Conversion event can’t get here soon enough.  As you may know, this is the time that anybody will be able to convert their traditional IRA’s to Roth IRA’s no matter your income level.  But currently as it stands now, if you make over $100,000 AGI Married Filing Jointly, your left counting the days until you are allowed to do so.

Common Misconception on Converting

A few people I’ve talked with thought that everybody had to wait to convert until 2010.  This is not the case. In fact, for many of you that have been contemplating whether to convert your former traditional IRA to a Roth IRA, now might be the year to do it.  With the recent decline in the market for 2008, chances are you’ve seen your investment accounts drop in significant value.  If you have a traditional IRA or a 401(k) at a previous employer, this might be the opportunity to convert that into a Roth IRA.

Why Is This A Good Time To Convert to a Roth IRA?

Reason being, when you convert to a Roth IRA, you have to pay the ordinary income tax on the converted amount.   By converting this year, your IRA’s have most likely dropped significantly and you will then have less to pay ordinary income tax with.  Sure it’s not exciting to see your account drop 30-40%, but if you could sock that away in a Roth IRA, think of all the tax free money down the road……woo-hoo!

Roth IRA Conversion Example

If your traditional IRA or previous 401(k) is worth $15,000, that would mean that you would have to claim $15,000 of income that year and then pay the according tax.  But let’s say that same 15,000 is currently worth $10,000 due to the recent market downturn, you then would pay less ordinary income tax on the converted amount; thus making it a timely opportunity to convert to a Roth IRA in a down market.

Before You Get Too Excited

Please keep in mind that currently if you individually or jointly make over $100,000 or modified adjusted gross income, you cannot take advantage of this opportunity.  Your first window of opportunity will not be until the year 2010, which then depending on the value of the accounts  might be another time of considering converting to a Roth IRA.

Update: Check out my latest post that shares some real life scenarios and tax consequences of converting a Traditional IRA to a Roth IRA.

Other good reads:

*Restrictions, penalties and taxes may apply.  Unless certain criteria is met, Roth IRA owners must be 59 1/2 or older and have held the IRA for 5 years before tax-free withdrawals are permitted.

Securities offered through LPL Financial member FINRA / SIPC.

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