Roth IRA conversion
is not as simple
as it appears
Roth IRA conversion
is not as simple
as it appears
At
first glance it seems that converting your traditional IRA to the Roth IRA
wouldn't require much analysis. If you are young, a conversion seems to
make sense, and if you are older, it seems less attractive.
The
growth of the Roth IRA is tax-free. There are no minimum distribution requirements.
And the withdrawals are not reportable as income.
However,
it is not as simple as it appears. There are a number of considerations
that need to be assessed before making a decision with such long-term effects.
Does
paying the taxes "up-front" instead of the "back-end"
provide an advantage? Will it throw you into a higher income tax bracket?
Does your state follow the `no tax' exemption on withdrawals and annual
earnings? Are there any penalties involved in withdrawals? What happens
if you earn more than the allotted amount?
"These
are just a few of the considerations that need to be addressed in the decision
to convert from a traditional IRA to the Roth IRA," says Carrie Coghill,
a certified financial planner and founding member of D. B. Root & Co.,
Pittsburgh, PA. "Paying the tax up front could be very costly. For
example, say you have $100,000 in an IRA and are in the 28% tax bracket.
You take it out to convert it to a Roth. That $100,000 is added to your
income. If you convert in 1998, that amount is spread out over the next
four years. That added income could put you into a higher tax bracket and
you would have to come up with the additional money to pay the taxes."
"Because
the Roth IRA is so new," Coghill warns, "all the rules and regulations
haven't been completely worked out. The tax exempt rule might remain unchanged,
but the Roth's appreciation might be subject to a minimum amount tax or
might be considered when determining taxability of Social Security Benefits."
The
clarification and adjustments are presently being prepared by the Joint
Committee in the Technical Corrections to the Taxpayer Relief Act of
1997. According to Coghill, "Deciding what path to take should
be planned now, but you should wait until later in the year to convert.
That gives the Joint Committee time to make changes, state legislatures
time to act and you time to either seek expert help or thoroughly examine
your situation. And it still allows you to take advantage of the four-year
application should you decide the conversion is right for you."
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