Q My husband and I have managed to put away retirement money. Luckily, I took it out of the stock market before losing much. Our home is paid for and we have no loans. He is 52 years old and I'm 50. He is self-employed (a cabinet shop owner) and I have a job paying $30,000 a year (gross). He has been building his business for the past 15 years. We have other savings in certificates of deposit at a local credit union.
Would it be advantageous to convert our IRAs to a Roth IRA at this time? I'm afraid tax rates will be increasing at the time we plan to retire.
LINDA
A For many people, it's worth running the calculator to see if it pays to convert a traditional IRA into a Roth IRA. The answer often is that the conversion is a smart way to take advantage of the bear market. (Remember, a traditional IRA is funded with pretax dollars; you pay your federal income tax rate on withdrawals during retirement. The Roth is funded with after-tax dollars, but when you take the money during your golden years you don't owe Uncle Sam anything.)
The upfront tax hit on conversion should be relatively small and eventually dwarfed by the benefit of tax-free withdrawals in retirement -- especially if you still have many years for the money to compound, as you do. An added benefit of the conversion is that, unlike the traditional IRA, the Roth has is no mandatory withdrawal schedule beginning at age 70 1/2.
I don't know if tax rates will be higher in the future, but it's a reasonable concern with the aging of the population and increased government borrowing.
That said, conversion isn't for everyone. Your modified gross income has to be less than $100,000 to make the conversion. (That rule will be scrapped starting in the 2010 tax year.) The same $100,000 limit applies to the overall income of couples filing jointly as singles. Those who are married but file separately can't convert at all. (I don't make these rules up; I'm just reporting them). Another important test is whether you have other sources of funds to pay the tax bill.
The IRA laws are complex. You can get a detailed description of the conversion rules at www.fairmark.com. Many IRA conversion calculators are on the Web, such as the one at www.dinkytown.net.
