Benefits December 31, 2009

Report Warns of Cost of Roth Conversion

December 30, 2009 (PLANSPONSOR.com) - Converting from a traditional IRA to a Roth IRA may come with a hefty price, according to a new analysis by the National Center for Policy Analysis (NCPA).
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A press release said someone who converts to a Roth IRA will have to pay taxes on the traditional IRA amount, either by using some of the IRA funds or other funds. According to the NCPA report, deciding whether to convert depends largely on the ability to pay the taxes that are due when the conversion takes place. 

NCPA says a Roth IRA conversion is ideal for anyone who:

 

  • Can pay the taxes using money from nonretirement funds,
  • Expects their federal income tax rate when they retire to be much higher than it is today – because their income will be higher and the burden of government will be higher, and
  • Faces little to no federal income tax burden today – so that a conversion would cost very little to complete.
The NCPA analysis includes a table that explains what a Roth conversion would cost in taxes. The table is at http://www.ncpa.org/images/123109_roth_conversion.jpg.

 “Whether you choose to convert to a Roth IRA or not depends on your preferences for paying taxes, as well as your expected income during work and retirement,” said Pamela Villarreal, NCPA Senior Policy Analyst and co-author of the report, in the press release. “However, the new rules for Roth IRA conversion at least provide people with more choices regarding their retirement savings.” 

For the full NCPA report, go to http://www.ncpa.org/pub/ba684.

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