Stern Advice: The year-end race to Roth

(Refiles to clarify sentence in paragraph 8)

By Linda Stern

WASHINGTON, Nov 24 (BestGrowthStock) – All year, investors and
savers have been hearing about the special 2010 opportunities
for saving taxes with Roth Individual Retirement Accounts. So
far, there hasn’t been a lot of action.

That’s about to change. Financial firms like Charles Schwab
(SCHW.N: ) and Fidelity Investments are bracing for a last-minute
rush as account holders race to convert their traditional IRAs
to Roth IRAs before the sun sets on those 2010-only deals.

“We expect to see a sharp increase in Roth conversions
during December with upwards of 30,000 conversions,” said Petra
Campos, director of retirement products at Schwab.

Fidelity, the country’s largest retirement plan provider,
has completed 135,000 conversions through October and is
expecting a year-end surge, Reuters has reported.

That’s because 2010 delivers special benefits to people who
convert their IRAs into Roth IRAs. (Roth IRAs fed with
after-tax money can grow for years and then distribute tax-free
withdrawals to retirees. Account holders are required to pay
income taxes on the tax-deferred amounts they convert.)

Starting in 2010, all taxpayers, regardless of their income
level, are allowed to move money from a traditional IRA to a
Roth IRA. Up until this year, only people earning less than
$100,000 could do that. At the end of this year, that benefit
expires, although many observers expect it will be extended
along with a large package of George W. Bush-era tax cuts.

But another key benefit is now starting to make the Roth
conversion seem even more attractive: That’s the one-time-only
offer, good in 2010, to convert from a traditional IRA to a
Roth and then spread the resulting tax burden over 2011 and
2012. With most Washington-watchers now expecting that the
current income tax rates will be extended through 2011 at
least, and possibly 2012, that gives converters the opportunity
to lock in relatively low tax rates on their conversions and
still defer the burden for a year or two.

That’s just the tip of the iceberg, though. Tax advisers and
other experts have been busy studying the tax angles to figure
out how retirement savers can really make the most of those
conversions. For example, another wrinkle in the law allows
taxpayers to reverse their 2010 conversions up until October
15, 2011. So you can convert now and wait to see how tax rates
and investments look next year, before locking in your
decision. Here are some points to consider:

* Know your tax rate. The key to making a smart decision
about whether to convert to a Roth is knowing what your tax
rate is now, and having a good guess about what your tax rate
will be in the future. Conversions work best for people who
expect their tax rates to be higher in retirement than they are
right now. That could happen if Washington decided to raise
income tax rates over the next few years, or if your income is
so high (and you have so much money in tax-deferred retirement
accounts) that you actually expect your retirement rate to go

* Break it up. Don’t convert all of your IRA at once,
advises Karen Goodfriend, a Los Altos, California, CPA and
personal financial advisor. She suggests that taxpayers phase
in their Roth conversions over several years, converting only
as much as they can in any given year without pushing
themselves into a higher tax rate.

* Don’t put it all in the same place. If you have the
ability to deal with details and uncertainty, consider
splitting your Roth money into several accounts and putting a
different asset class in each account, says James Lange,
publisher of the Roth Ira Advisor Website
( That way, you could undo the
conversions of those Roths that actually drop in value between
now and next October, and keep the Roths that have started
earning you money right away.

* Think of your kids. There are a couple of great advantages
to having a good-sized Roth IRA when you retire. The first is
that having access to tax-free withdrawals could have the
effect of lowering your income tax rate across the board,
because it would lower the amount you’d have to withdraw from a
tax-deferred account.

A second advantage? Inherited Roth IRAs are awesome, says
Lange. People who bequeath Roth IRAs to their kids are
delivering years and years of tax-free growth and withdrawals
to the next generation.

* Do the math. Web-based calculators designed to tell you
whether you should convert to a Roth aren’t ideal; they don’t
include all of the variables that might define your unique
situation. But they’re not bad for a ballpark estimate,

You can find online converter calculators at the Schwab
Website and at the financial literacy site of the American
Institute of Certified Public Accountants
( One more tip to get you started: If
you have to pull money out of your traditional IRA to pay the
taxes that will be due on the conversion, it’s a lot harder to
make it all work, says Goodfriend.

* Don’t just defer the taxes, defer the tax decision. If you
convert to a Roth IRA in 2010, the IRS default setting would
have you spread the resulting taxable income between 2011 and
2012. But you don’t have to do that. You can declare the entire
conversion amount in 2010 and pay taxes on it with your 2010
tax return. That means you have until April 15, 2011, to decide
whether you want to pay now, or later. If you’ve had a really
bad year this year, and your tax rate is really low, you might
want to take the income right away.

(The Personal Finance column appears weekly. Linda Stern
can be reached at linda.stern(at)
(Editing by Gunna Dickson)

Stern Advice: The year-end race to Roth