Tax Q&A: When to change to Roth IRA?

As the April 15 tax deadline fast approaches, you probably have questions. Fortunately, we have answers. Every day until April 15, members of the American Institute of Certified Public Accountants have agreed to answer selected tax questions from USA TODAY readers. Submit your questions to jwaggoner@usatoday.com.

Q. When is a good time to change a traditional IRA to a Roth IRA? What is the tax rate for switching to a Roth IRA? I need advice about the feasibility of doing this or keeping my money in a traditional IRA account. Can I do it in increments as time goes on to lower my tax burden? I am retired.

A. That depends on a variety of factors. First, you will pay the taxes owed upon the conversion to a Roth IRA. Your traditional IRA has never been taxed. So upon conversion, those funds will be taxed at ordinary income tax rates. You can determine how much you want to convert in a given time period to control the amount of taxes owed. Besides spreading this out over several years, you also want to ensure not to do too much in any one year which could increase your overall tax bracket for all of your earnings in that one year.

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It is true that all of the distributions from a Roth are tax free after you pay the taxes on the conversion. But you should consider how long the assets will grow inside the Roth prior to taking them out. If you are going to be taking the assets out in a relatively short period of time or they will be in lower growth assets then a conversion may not make sense. The benefit to a Roth is the tax-free distributions but if there is minimal growth then that benefit is not as good as if there is significant growth that now will be tax free. Also you need to think about tax brackets. If your bracket will decrease significantly in retirement due to earnings and you will not be in a very high bracket then paying the taxes upon conversion only to take a tax free distribution in a lower bracket may not make! sense.

Douglas P. Duerr, CPA/PFS, CFP. Duerr & Duerr, LLP - Partner, Montville, N.J.

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