Should You Convert Your IRA to a Roth IRA

Have you been putting your money in traditional IRA (Individual Retirement Account) for so long? If you want to manage your personal finance in such a way that you have more money at retirement, then you can think of converting your traditional IRA to a Roth IRA in 2010. Previously, only taxpayers earning less than 100,000 USD were allowed to convert IRA to a Roth IRA by paying a tax on the tax-deferred amount of the conversion. However, in 2010, the limit has been removed and anyone can convert his/her IRA to a Roth IRA.

Factors to Consider While Making a Decision

You should consider the following factors while making a decision whether or not to convert your traditional IRA to a Roth IRA in 2010.

• Paying taxes on conversion : You should not convert your traditional IRA to a Roth IRA if you need to liquidate a part of your account so as to pay the taxes on conversion.
• Tax rate on retirement : While making the decision, you should consider whether or not you think your personal income tax rates will be higher in future, when you’ll withdraw at retirement. The rate can be higher if Federal Government decides to increase it in order to fix deficit. If you think your tax rates will be higher at retirement, then it’s better to switch to Roth IRA as you won’t have to pay any tax for withdrawing the accumulated amount.
• Spreading tax burden : Think before spreading your tax burden to 2011 and 2012. This is because the tax cuts introduced by Bush is about to expire this year. Though Obama has announced that he wants to preserve the tax cuts for families earning less than 25,000 USD, yet there’s no guarantee that it’ll remain in the future years. In addition, limiting deductions for high earners may hit you more if you convert a big amount of IRA as it can push you to relatively high tax brackets. However, if the conversion is pushing you into a higher tax bracket in 2010, then spreading it over 2011 and 2012 may help you to be in the lower tax bracket.

It may happen that you want to withdraw a certain amount from your Roth IRA for the purpose of debt consolidation or financing your child’s education. However, if you withdraw from your Roth IRA before you reach 59 ½ years of age, then you’ll have to pay 10% penalty on the amount withdrawn. However, in case of owner’s death of disability, the early withdrawal penalty will not be applicable.

Jason Holmes is a regular writer with Debt Consolidation Care and is also a contributory writer with other financial sites. His expertise is woven around various aspects of the debt industry and with his e-books he tries to impart to people the different situations and simple solutions to get out of difficult situations. Some of his works include e-books like Credit Score The Quintessential Therapy for a Happy Pocket, Take Creditors and Collection Agencies to Small Claims Court and My Story- From Depression To a Smile.