Converting to Roth ? DO the MATH.

First, let me clarify one important point because bloggers, media experts, & financial advisors often times use the term "Conversion Tax" when describing the income taxes that are created when converting to Roth IRA. No, its not an extra tax, there is no extra tax. It's simply the tax that you owe. Remember the money in the traditional IRA has not yet been taxed. Therefore, if you convert to a ROTH you simply take the portion of the traditional IRA
that has not yet been taxed and include it as taxable income in the year of conversion. (You
do not include the portion of any non-deductible contributions that may have been made to a
traditional IRA.)


Lets say you have $95,000 of taxable income from regular income sources and you convert a $50,000 traditional IRA to a Roth in 2009 then, in effect, the total taxable income that year would be $155,000. If you convert in 2010, half of the $50,000 will be added to your taxable income and the other half will be added to your 2011 taxable income. This only applies if you convert in 2010.

My advice is to seek the guidance of a knowledgeable advisor who is going to do the math for you to really determine whether it makes sense for you to convert or not. Please note you don't have to convert all your traditional IRA to ROTH. You can do it in staggered basis or you can
convert just a portion of it. That way, you have money that is taxable, money that is tax free and money in a tax advantaged account.








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