Written by Admin | Nov 17, 2008 5:00:00 AM
If you have earned less than $100k in adjusted (combined if married) gross income this year and have an individual retirement account, you may want to consider converting it to a Roth IRA before year end, potentially saving considerable tax dollars down the road.
Here is how it works. When converting an IRA to a Roth IRA, the conversion amount is included as income on your tax return. With asset levels in most IRA accounts likely significantly depressed this year, it may make sense to pay the taxes on these lower values today rather than wait until future years when asset levels may be higher and eventual distributions required. In the event that your converted IRA continues to decline, don't worry as you would have until October 15th of 2009 to recharacterize the Roth back into a regular IRA.
Keep in mind that this only makes sense if your adjusted gross income levels meet the requirement and you have the liquidity to afford paying the income taxes due from funding sources outside of the converted IRA. If you pay the taxes due from the converted IRA, you would be penalized 10% on the funds used from the IRA to pay the tax. The other nice thing about Roth Conversions is that once converted for a period of five years, you can access these funds without paying the 10% early distribution penalty.
While we are not tax experts, now may be a good time to discuss this option with your accountant of financial advisor and determine whether or not it might be a smart move for you to consider.