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Should I convert IRA to Roth IRA after retirement?

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in Small Business Tax

R.L. from Blackwood, N.J., writes:

Q. I retired earlier this year at 62 when I became eligible for Social Security benefits. During my career, I accumulated a big pension, which I rolled tax-free into an IRA. Now that the IRA's value has fallen due to the stock market, my accountant advised me to convert the IRA into a Roth IRA. This doesn't make sense to me because I'll be stuck paying tax on an account that can still lose money. What do you think?

A. It's hard to say exactly without knowing all the particulars, but your accountant's advice seems like a sound move.
It's true that if you convert the IRA to a Roth IRA, you must pay all the tax on the conversion upfront. But the thinking is that the account has been devalued, and it's probably as low as it will be in the foreseeable future. So this may be the optimal time to take the tax hit, especially since you had little taxable income this year.

With a Roth IRA, you don't have to pay tax on qualified distributions that you hold for five years. Those distributions are 100 percent tax-free. So if you don't need to pull money out of your account for a while, a Roth conversion could make perfect sense now.

Key point: If you make the switch and the account continues to lose value, you have until Oct. 15, 2005 to "undo" your conversion to a Roth IRA. Then after a 30-day waiting period, you can choose to reconvert to a Roth IRA at the lower account value, thereby reducing your tax liability on the conversion.

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