Usually when Washington gives you a tax break with one hand, they take something else away with the other - leaving you to decide which is better. That's certainly the case with new rules making it easier to convert your regular IRA account to a Roth IRA. This could be a great opportunity for you, but it's not a slam-dunk. So we're writing to let you know the change is coming and to help decide if you should investigate further.
Under current law, there are two kinds of IRAs. The regular IRA lets you deduct contributions today, and defer tax on your funds until you withdraw them. The Roth IRA, on the other hand, offers no up-front deduction, but lets you take money tax-free during retirement. And there are no required minimum distributions as with regular IRAs.
Today you can convert your regular IRA to a Roth IRA, if your income is under $100,000. Starting in 2010, however, you can do it regardless of how much you earn. What's the catch? You have to pay tax on the full amount you convert now.
If the tax you pay to convert today is less than the tax you would pay to withdraw the money tomorrow, it makes sense. But deciding isn't as easy as you might think - who knows where tax rates will be tomorrow? Even calculating the actual tax you'll pay to convert today is harder than it looks. You can't just assume that you'll pay your regular marginal rate. That's because you take the full amount you convert and add it to the rest of your income. And that has ripple effects to consider - like phasing out itemized deductions and personal exemptions, subjecting Social Security benefits to tax, and even pushing yourself into a higher tax bracket!
Bottom line: this is not a do-it-yourself calculation! So if you're curious about this opportunity at all, don't make an expensive mistake you can avoid. Call us - at 217-241-4597.
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