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Should you convert to a Roth IRA now?

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in Small Business Tax

Is converting a traditional IRA to a Roth this year a good idea? It de­­pends on the situation.

Strategy: Weigh the pros and cons. Although taxpayers no longer can benefit from a special tax break for conversions in 2010, converting to a Roth still might be a smart tax move. Of course, the conversion is subject to current income tax.  

The conversion technique often makes sense for high-income tax­payers who expect to be in the same or a higher tax bracket in retirement.

Here’s the whole story: The main advantage that Roth IRAs have over traditional IRAs is that qualified distributions from a Roth in existence at least five years are completely exempt from tax. This includes distributions made after reaching age 59½, on account of death or disability or to pay first-time homebuyer expenses (up to a lifetime limit of $10,000). In contrast, distributions from a traditional IRA are taxable at ordinary income rates.

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