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To Convert or Not to Convert?

September 10, 1998|DANIEL GAINES and KATHY M. KRISTOF

If you are eligible to roll over a traditional individual retirement account into a Roth IRA, paying taxes on the money now, should you do it?



* You will be able to keep all the money that compounds in a Roth IRA, provided that certain conditions are met, because the income earned is not taxed.

* Experts say that if your tax rate remains the same, if your portfolio grows in value at historical rates, and if you have at least seven years or so before you will start making withdrawals, conversion will give you more money to spend in retirement.

* If you have several decades before retirement, the mathematical argument in favor of conversion is even stronger.

* For 1998 conversions only, you have the option of spreading the payments for any tax bill out over the next four years.

* If you decide to withdraw money before retirement, a Roth allows you to take out your original contributions without paying taxes or penalties. Even earnings can be withdrawn tax-free for specific purposes, such as a house down payment.

* During retirement, you can withdraw money at any rate or in occasional lump sums without worrying about taxes. If you don't need the money, you can let it go to your heirs, free of income tax. However, the funds will count as part of the estate for estate tax purposes.



* You can't convert if you or you and your spouse filing jointly make more than $100,000 a year, excluding the rollover amount itself.

* You must pay income tax on the conversion.

* You need to have money available to pay the taxes from sources outside the IRA, and you may have more important uses for that money. (If you pay taxes out of the IRA money, you pay a 10% penalty on that amount and reduce your savings.)

* Your tax rate may be much lower at retirement, erasing or reducing the benefits of conversion.

* Tax laws may change and Congress could change the rules. If the change is radical--say the income tax is replaced by a sales tax--you would lose money in a conversion.

* If your account does not increase significantly in value before funds are withdrawn, you are worse off for paying taxes early.

* A rollover, particularly a big one, may make you ineligible for certain tax breaks and push you into a higher tax bracket for the next four years.

* The inheritance feature of a Roth IRA may not be important to you.

* You may need the discipline of the taxes and penalties of a traditional IRA to avoid the temptation to use the money for eligible non-retirement purposes--a home, for example.

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