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IRA rollover to Roth IRA would be costly

  • Article by: CHRIS FARRELL
  • Star Tribune
  • March 9, 2008 - 11:51 AM
Q: My wife and I have an IRA of about $200,000. Our experience is that if we make a withdrawal we will pay about 50 percent in taxes. We are both very near retirement and have been advised that if we roll over the IRA to a Roth IRA, we likely drop from $200,000 in assets to $100,000. Future earnings and withdrawals would be tax free.

Part of our consideration is that with our Social Security and pensions, it looks like our income level will not drop very much, thus our tax rates would not drop. A retirement-needs analysis indicated that unless we really go wild we might not touch the IRA. That would mean that the IRA may be our legacy to our children. My understanding is that the Roth IRA will be more tax free to them than the regular IRA. Any suggestions? -- MICHAEL

A: In most cases, for the conversion from a traditional IRA to a Roth IRA to make financial sense you'll want to pay the taxes you'll owe from non-IRA savings. You'll need to run the numbers to make sure it adds up financially.

For estate planning, a Roth is terrific. First, with a traditional IRA the law requires you to start withdrawing money at age 70 1/2. But a Roth IRA is exempt from that requirement. That means your money can continue to compound for your heirs. Next, your children won't owe any income tax on the withdrawals they make from the inherited IRA. However, they will have to start taking out money since it's at this point the minimum withdrawal rules kick in. They can stretch out those minimal payments for a long time.

For research on Roth IRAs, I suggest Ed Slott's "Your Complete Retirement Planning Road Map: The Leave-Nothing-to-Chance, Worry-Free, All-Systems-Go Guide."

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Chris Farrell is economics editor for American Public Media's weekly "Marketplace Money" show on public radio. He lives in St. Paul. Send questions to cfarrell@mpr.org and put "Your Money" in the subject line.

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