(Dow Jones) Is it finally time to convert a traditional individual retirement account to a Roth? And if so, how should you do it?
We asked four IRA experts those questions and got four slightly different, but smart, answers worth considering.
This is the first year all taxpayers have been eligible to switch into Roth IRAs, which promise tax-free withdrawals in the future. With higher taxes on the horizon, many are gritting their teeth and taking the tax hit now. Fidelity Investments says that as of June 30 it had handled 100,000 conversions, four times the number for the same period last year.
But the decision to convert can be tricky, involving assumptions about future investment returns and tax laws. So we asked CPAs Ed Slott and Robert Keebler, and attorneys Seymour Goldberg and Natalie Choate what they are doing with their own accounts.
The gist: Three say they have either made Roth conversions or plan to do so soon, and the fourth says he will do so if the market tanks. Thus, all believe their own tax rates will be the same or higher in the future, and they aren't worried that Congress will curtail Roth benefits enough to make them rue the move. In addition, all say they will use non-IRA funds to pay any conversion taxes.
Beyond these general similarities, however, each has taken a different tack. Here are their strategies:
Ed Slott: An IRA advisor and vocal Roth advocate, Slott, 56 years old, says he converted nearly all his six-figure IRA in January. With his advisor's help, he separated the funds into a half-dozen Roth accounts, each for a different asset class or sector such as energy, health care or real estate.
Slott says he plans to monitor his Roths and then reverse the conversions (called "recharacterization") of accounts that have dropped in value or lagged behind. The tax law allows this move as late as Oct. 15 of the year after the conversion date. So he has a 21-month window to decide which accounts to undo, and how much tax to pay. Yet his taxes will be figured as of his conversion date last January.
"It's the way to get the biggest bang for my tax buck," says the Long Island, N.Y., accountant. But he left a few hundred dollars in his regular IRA so that it could receive any money from reversed conversions, which cuts paperwork.
An open question: whether Slott will pay his conversion taxes at this year's top rate of 35% or elect a one-time deferral into tax years 2011 and 2012. On one hand, tax rates likely will rise after this year. On the other, the deferral combined with the six-month extension available to all taxpayers would push the payments for his 2010 conversion into 2012 and 2013. Once elected, this deferral can't be reversed, but he doesn't have to decide until October 2011, when his 2010 tax return will be due.
Robert Keebler: Keebler, a CPA in Green Bay, Wis., says he plans to make a Roth conversion of about 20% of his retirement assets before 2011. He will leave the rest in a company pension plan that offers better asset protection than Wisconsin gives to Roth holders. "I've never been sued," he says, "but I think this makes sense." (State law varies on asset protection; Slott says New York's protection is ample for him.)