To Convert To Roth or Not To Convert To Roth

As  my CPA and I  were wrapping up my taxes the question of converting a traditional IRA to a Roth IRA happened to come up in the conversation. I was surprised to discover my accountant agreed with me and said he thought it was one of the worst ideas he’s come across since someone decided to bake raisins into perfectly good plain bagels.

When it comes to investment concepts usually accountants and investment people mix about as well as the Village People mingling at the Republican Convention.  This time my CPA and I were on the same page.

This is the year of the Roth where really rich people are now able to convert their traditional IRAs because there are and have been income restrictions that prevented the wealthy to take advantage of tax-free Roth IRAs. It also is the one year where there is a window that allows people to pay taxes on the conversion over two years rather than in the year of the conversion.

Of course there is always the spillover where news of what the uber-rich are doing filters down to the more than comfortable folk. And what we get is the syndrome if- it’s- good- for- them- why- not- us-too.  Now lots of people across all income spectrums consider conversion to the Roth.

Just so you know -its always been that as long as your income qualifies you can convert some of the regular IRA each year until everything is in the Roth from the regular IRA, or do it all at once. It is also possible to use the assets in the regular IRA to pay the income taxes on the conversion but if under the age of 59 1/2 there is a 10% penalty for the amount used to pay taxes. There is no penalty on the conversion assets if under the age of 59 1/2.

The reasons that people do this foolishness of paying taxes on perfectly good tax deferred money is the assumption that taxes will be higher later because of income at retirement so they figure to pay the tax now and allow the money to grow tax-free. Secondly, investment growth, it is guessed, will create a pile of money over the years that the tax man has depleted.

Both these thoughts belong on Myth Busters. A tax reduction of 35% will need a 70% increase in the investment portfolio just to get back to even. If retired this may never happen. If working this may never happen before retirement. As far as higher taxes later no one knows for sure so why gamble on something we do not know?

The best thing most of us, including the really really rich, can do is leave things alone, pay taxes on the withdrawals as they are due and at death there are planning devises that allow spouses and children to take advantage of to minimize the impact of the regular IRA income tax.

If you have questions on this blog call Paul at 877 783 7080 or write pstanley@westminsterfinancial.com. share this blog with someone who cares about money.