Should I Convert to a Roth IRA?

Michael Kirsh
September 3, 2009 — 1,378 views  
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In the coming months, you'll be hearing a lot about Roth IRA conversions, due to the elimination of the $100,000 income limit, effective January 1, 2010. Beginning January 1, 2010, taxpayers at all income levels will be able to convert, and the resulting income tax liability is payable over two years, 2011 and 2012. The answer to this question is both mathematical and political.

While there are several reasons why a Roth IRA conversion could be favorable, the key to success in a Roth conversion is in either or both of two factors: (1) the individual expects future tax rates to be higher and/or (2) the individual has a time horizon of expected income tax-free growth that is sufficient to offset the disadvantage of the immediate tax liability.

There are no hard and fast rules that make this analysis easy. For some, unused tax attributes, such as charitable carry forwards, the Roth IRA conversion can "free up" the unrealized tax benefit, and paying little to no income tax on the conversion. Each case must be analyzed on its own, taking into account the overall effect on net-worth and wealth ultimately passed to heirs.

Our advice to anyone even thinking about converting is to convert the IRA on January 4, 2010, and segregate by asset class into several Roth IRAs. You will have until October 15, 2011, to decide whether to pay the tax or re-characterize the Roth IRA back to a traditional IRA and eliminate income tax. By segregating into several Roth IRAs, you may re-characterize those which have decreased in value, while allowing the other Roth IRAs to remain unchanged.

Michael Kirsh


Michael Kirsh Founding principal of Kirsh Financial Services, Inc. Has been solving the problems of closely held business owners in the areas of business succession and retirement planning since 1977 Recognized authority on the subject of sophisticated insurance planning with many publishing credits to his name Has addressed numerous seminars and workshops on these subjects around the country Certified financial planner, accredited estate planner and charted life underwriter Listed in Who's Who in Finance and Industry, and Who's Who in the World.