If you’ve been paying any attention to the personal financial media, you are well aware that there have been some important rule changes and opportunities created in 2010 surrounding Roth IRAs. Many individuals who were previously unable to own a Roth account can do so today.


Whether or not converting IRA assets to Roth IRA assets is a good deal for any individual is driven by a number of factors.

For some individuals, the decision is less complicated. Either the benefits clearly outweigh the costs, or the costs clearly outweigh the benefits.

For others, deciding whether or how much to convert today is more complicated. The decision requires an understanding of personal priorities and assumptions about what the future may bring, as well as a willingness to take some risks.


The following factors can tilt the balance in favor of a Roth IRA.

• Low costs to convert: If you’re in a zero tax bracket or a low tax bracket today (or in the years 2011 and 2012), it will cost you less to convert to a Roth IRA.

• Future tax rate expected to be higher: If you are convinced that the rate of tax levied against your income is going to be higher in the future, you may want to pay the taxes today at the “cheap” rate and get it over with.

• Able to preserve IRA assets to very old age or for heirs: A benefit of Roth IRAs is that no distributions are required during the participant’s lifetime. Thus, more tax-free compounding can occur in a Roth IRA during the owner’s life than is possible from a traditional IRA.

• Assets available from outside the plan to pay taxes due: Paying the tax due with assets outside of the retirement plan can increase the amount of money that stays inside the plan and accrues tax-free.


Here are some factors that may make it less likely that an individual will benefit by converting assets to a Roth IRA.

• Historically high market value of investments: If you convert during a historically low period in the market, you are likely to get a better “deal” than if you convert and pay taxes when assets are at a market high.

• High costs to convert: The conversion may be less favorable if you are currently in a higher tax bracket than you are likely to be in the future.

• Unfavorable rule changes: The government can change rules. Such changes can alter whether or not prepaying taxes turns out to be a good deal.

• No assets available outside of the plan to pay taxes: If you must pay the tax due from assets held inside the plan, it has the effect of increasing the cost of conversion.


A Roth IRA is a nice asset to own. But like most good things, it costs money to acquire. How much you pay depends largely on your tax rate and the amount you convert. Making the decisions surrounding what assets should be in which type of account is not simple, as numerous unknown factors and personal consideration come into play.

Following are three key considerations each individual should explore before investing the up-front money for a Roth conversion:

• What benefits will you gain with your Roth account? While everyone with a Roth gains a tool to help manage taxation in the future, some individuals clearly have more to gain than others.

• How much of my assets should I have in Roth IRA? Once it is determined that the benefits of a Roth account are worth considering, the next question is how much to convert. Roth IRA conversions are not an all-or-nothing deal — you can convert as little or as much as you are willing to pay the tax on.

• What is the most efficient means of meeting my Roth IRA objectives? If you are going to convert traditional IRA assets to a Roth, you need to develop a strategy. For example, you can convert a small amount every year, or do a large conversion all in one year.

Both the costs and benefits associated with making informed decisions here are high, so give it the attention it warrants, get help if you need it and do it right.


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