Roth IRA -

Should I Convert to a Roth IRA?   
Ken Morris

Should I Convert to a Roth IRA? This is a perplexing question many investors are asking themselves in the wake of all the new tax laws.

If the opportunity is available, should an individual take a distribution from an existing IRA and roll it over to a Roth IRA? A good question, but not so fast. The first question should be; "Can I change to a Roth IRA?"
Eligibility to elect a rollover from a traditional IRA to a Roth IRA is limited to those with an Adjusted Gross Income (AGI) of less than $100,000 - single filers and married filing jointly. There have long been rumblings as to this limit being raised; however, the limit has not been changed. What has been changed is how you calculate that $100,000 conversion threshold. Beginning in 2005, required minimum distributions are no longer included in countable income for purposes of the conversion threshold. Thus many more individuals will be able to squeeze under the $100,000 limitation.
Other individuals will still be excluded from even considering a Roth rollover. In light of this, individuals with the ability to do so are likely to manipulate their compensation in 2005 to fit under the current $100,000 limit. An example of this strategy might be as simple as deferring a bonus into 2006 or as complex as restructuring contract agreements. Regardless, the availability of a Roth rollover must be confirmed before evaluating the considerations relative to the alternative IRA strategies.
OK. Let's say the income limits of the Roth IRA are no problem. What are some of the considerations in comparing a traditional IRA to a Roth IRA? Conventional wisdom suggests that most taxpayers expect to be in a lower tax bracket when they retire. Financial planning based on this assumption would advise an individual to defer taxes to the greatest extent possible during working years, and ultimately pay the tax bill during retirement at a lower individual rate.
Using this logic, converting to the Roth IRA would appear to be a less attractive strategy with taxes paid sooner, based on the individual's current tax bracket. These days, many people are asking the question; "Will I really be in a lower tax bracket in retirement?" Some important considerations include: What is the likelihood of higher marginal tax rates in the future? Will current deductions for dependents, business expenses and or mortgage interest offset less income in retirement? Will the individual continue to work in retirement, or will they even need the income? Is the objective of the IRA to accumulate assets for heirs? Evaluating the tax impact of the Roth IRA vs. the traditional IRA depends on the assumptions made.
Another important consideration in comparing the two alternatives is the manner in which the tax on the distribution from the existing IRA will be paid. For example, a person with a top marginal bracket of 28% is considering rolling over an existing $100,000 IRA to a Roth IRA. When the $100,000 is distributed, the tax due will be $28,000. If the comparison to the existing $100,000 IRA is made with the Roth IRA starting $72,000 ($100,000 - $28,000), the result will be much different than if the Roth IRA starts even with the traditional IRA at $100,000. In addition, if the $28,000 tax is paid from the distribution amount, the 10% premature withdrawal penalty may be applied to that amount.
If the tax is paid from the proceeds of the IRA being rolled over, a true apples-to-apples comparison would start the Roth IRA at $72,000. However, if the assumption is made that the tax will be paid from some other source and the Roth IRA starts out at $100,000, the result will likely favor the Roth IRA. This is true even if a calculation is made to consider the opportunity cost of the dollars being used to pay the $28,000 tax due on the distribution from the original IRA.
There are also several other considerations. The uncertainty of tax rates in the future makes this comparison increasingly complex. In addition, the age of the individual electing to roll over from a traditional IRA to a Roth IRA is important since the advantage of tax-free distributions from the Roth IRA is leveraged by the length of time the dollars have to grow. The advantage of rolling over to a Roth IRA generally decreases as the age of the individual increases. Another factor is that, while the individual is alive, the Required Minimum Distribution (RMD) rules have no impact on a Roth IRA.
In summary, there are many variables in the traditional vs. Roth equation that should be evaluated on a situational basis. There are no simple formulas that spell out a clear decision. An individual's IRA strategy should be integrated with their overall financial and estate plan to achieve optimal results. For many people, the guidance of a professional financial advisor will be a critical aspect in making the decision that is right for them.

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Things To Think About When Considering A Roth Conversion (Washington Post)
Good news: You're eligible. Until now, only taxpayers with incomes of $100,000 or less were permitted to convert a traditional retirement account to a Roth IRA. But the income-eligibility limit on Roth...