Friday, December 3, 2010

IRA Holders Still Undecided About Switching to Roths

Financial Planning posted an article on its website today titled, "IRA Holders Still Undecided About Switching to Roths". In the article, author Temma Ehrenfeld discussed a statistic that 23 percent of the middle class remained undecided in October about converting to an IRA.

CLICK HERE to read the entire article.

The Slott Report's Take:

A key point to remember is the opportunity to spread the tax bill out over two years (2011 and 2012). This advantage expires on December 31st of this year. The survey by First Command shows that people do understand the benefits of a conversion, but many are leery because:

1)They believe they will be in a lower tax bracket in retirement
2)They do not have the money to pay the conversion taxes up front

Consumers should realize that tax rates will likely rise so you may be underestimating your tax bracket in retirement. And if not, you can always undo a Roth conversion up to October 15th of the year after the conversion. That is called a Roth recharacterization.

Roth conversions are NOT for everyone, but it is a subject you should talk about with your financial advisor before year-end. Also, make sure you know where you are going to get the money to pay the tax.

As Ed said at the end of the article:
"If a client does not have enough non-IRA funds to pay the tax on a Roth conversion, the conversion generally won't be worth it."