Starting January 1, an income limit that prevented many Americans from converting their traditional IRAs into Roth IRA's will disappear. If your household income is more than $100,000 (the curent limit), coverting to a Roth will be an option for the first time. Married couples filing separate tax returns also will now be able to convert.
Should you convert?
The benefit of converting to a Roth is that you can potentially put some or all of your retirement savings out of reach of tomorrow's tax collectors. Qualified withdrawals from a Roth IRA are tax-free, which means any future investment gains can be shielded from the IRS. In addition, converting allows you to avoid the IRS's required minimum distrubitions (RMDs) that kick in the year after you turn age 70 1/2.
But converting isn't for everyone, and it's a good idea to check with a tax or financial advisor before you make a decision. As you weigh the pros and cons, hear are some important points to keep in mind:
1. You have to pay taxes on the amount you convert.
2. It's a good idea to use money outside of your IRA to pay the conversion taxes.
3. You can lighten the tax burden of a conversion.
4. Penalties may apply if you withdraw within 5 years of a conversion.
5. Your heirs may benefit from the conversion.
