Should I Convert to a Roth IRA?

Wendy Shick | May 14th, 2010

We’ve heard a lot about the benefits of converting your traditional IRA to a Roth IRA over the past several months, and you probably already know the decision has many considerations. Here are three more to consider:

Roth IRA Conversions

Waiting to convert could you cost more in taxes starting 2013. As part of the recently-passed healthcare reform legislation, a new 3.8 percent Medicare tax on net investment income, including interest, dividends and capital gains, will be implemented on January 1, 2013, for single taxpayers with adjusted gross income above $200,000 and joint filers above $250,000. The new tax was designed as one measure to help cover the costs of expanding healthcare coverage.  This new tax treatment may make it more advantageous to make the conversion to the Roth IRA sooner, rather than later.

Your age, and that of your children.  If you are a young professional and thinking of switching a traditional IRA to a Roth, the conversion may be an excellent move because you have a long time to recoup, through your IRA’s investments, the amount you’ll pay now in taxes. For individuals who intend their IRA funds to be given to their families, making the conversion to the Roth IRA and paying taxes now will lessen the tax burden on family members as well as lessen estate taxes. On the other hand, if you have children preparing for college and will soon be completing financial aid forms, your IRA conversion could place you at a higher income level and negate financial aid eligibility.

What you do in 2010 could impact your Medicare premium in 2012. Since during the tax year of the conversion you must claim the amount being converted from your traditional IRA as income, the result is a higher income total at the end of the year. And if you pay Medicare premiums, your total income is subject to review each year when your Medicare premium is determined. Because Medicare has a two-year lag behind federal income taxes, your income from 2010 would be used to determine Medicare premiums for 2012. You could pay as much as $200 more per month for individual or $400 per couple, for that year’s Medicare premiums. Your premium would be reassessed the following year and would be reduced if you did not continue to show the same income level.

The decision to convert some or all of your funds to a Roth IRA depends greatly on your individual circumstances. Your financial professional can run a series of calculations to help you decide which decision is best for you.

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