Roth IRA's

I've spent a fair bit of time since the beginning of the year researching whether or not it makes sense to suggest to clients to convert traditional IRA's over to Roth IRAs.  It's a complicated subject, not given to one blanket recommendation. Most of the accountants I've spoken too think that high income wage earners should take advantage of the provisions, especially if the IRA holds assets not easily marked to market.  However, at least one that I've spoken to thinks doing the conversion isn't worth the time and effort especially because it generates a tax bill in a year when money for a lot of folks is still tight.  Below I've excerpted a Barrons article on the subject from last week.  I'm still trying to work out what I think of conversion for clients.  Here's what Barrons said.  (Highlights mine).

You Can't Take It With You, but You Can Convert

By J.R. BRANDSTRADER

WANT TO LOCK IN A TAX-FREE LEGACY for your heirs this year? Well, if you're wealthy enough to have built up assets that normally would be subject to the estate tax, this is an excellent time to meet your maker -- because that onerous levy has at least temporarily been eliminated. But a less drastic course would be to convert your traditional individual retirement account into a Roth IRA.

On assets held in a traditional IRA, taxes are deferred until distribution. This is because for people in certain income groups, contributions to a traditional IRA are tax-deductible. So Uncle Sam demands part of any gains when withdrawals are made.

Distributions from Roths, in contrast, are tax-free, because contributions are made with after-tax income. So, even if you don't give a hoot about Junior, converting to a Roth may still make sense -- given that there's a strong possibility that taxes will rise. Says Vern Saper, an employee-benefits attorney with the law firm of Warner Norcross & Judd in Grand Rapids, Mich.: "After 2010, tax brackets will revert to their pre-2001 levels. That means the highest four brackets will be 39.6%, 36%, 31%, and 28%, instead of the current 35%, 33%, 28% and 25%." And given the enormous national debt, there's little reason to believe that taxes will subside in the near future.  For retirees, Roth IRA distributions usually -- there are exceptions -- don't count as taxable income, whereas distributions from a traditional IRA do.

THE PROBLEM WITH CONVERTING a traditional individual retirement account to a Roth is that the amount being converted is immediately taxable.  However, with many retirees' nest eggs having been reduced substantially by the stock market's 2008-early '09 swoon, the taxes that would be owed after a conversion have been reduced, too. Better still, Uncle Sam is allowing the payments to be delayed. They can even be spread out over 2011 and 2012. What happens if the market takes another sickening nosedive? You can "recharacterize" -- meaning undo -- the conversion.

Says New York-based John Carl, president and founder of the Retirement Learning Center in Brainerd, Minn.: "Let's say you convert $100,000, and the market tanks. You can recharacterize, and it would be like it never happened.".........Despite all the potential benefits of converting to a Roth IRA, David Fusco, a certified public accountant and financial planner in Staten Island, N.Y, wonders how popular converting will be......adding that people are still reeling from the recent Wall Street meltdown and don't want to think about their finances......Fidelity finds that only 7% of investors surveyed say they will convert to a Roth IRA now, and that 88% are unaware of the opportunity.....Government mistrust is another factor. A TD Ameritrade survey found that 36% of ideal candidates for conversion suspect that Washington will somehow change the rules later to help reduce the national debt, partially at Roth IRA holders' expense.....

.....So should you convert?....{T}he younger you are, the greater the advantage because of the time value of money allows your investment to compound tax-free, rather than tax deferred.... Roths have another advantage over traditional IRAs: There are no mandatory withdrawals after the age of 70½. (Mandatory withdrawals were suspended for 2009 because so many portfolios were hurt by the financial crisis -- but just temporarily.)

The Bottom Line:

Converting to a Roth IRA can help reduce taxes on retirement assets. But most investors will need expert advice to navigate the thicket of tax laws -- and the risk that these might change.  In general, the move makes sense if you don't need the money, you want to prepay taxes for your heirs, you will be in a higher tax bracket when you retire...or you have battered investments and want to reposition them.

You may want to pass if you have to use IRA assets to pay the taxes or any penalty on the conversion. "You shouldn't make the conversion unless you have the resources set aside to pay the taxes. Don't do it if you have to sell stock or other securities to pay the bill," says Elizabeth Ruch, a San Diego-based financial advisor at Waddell & Reed.  Above all, don't do this on your own. The rules are many and complex, and without expert advice, you could end up owing more than you figured.

Link:  Barrons on Roth IRA conversions