Monday, February 8, 2010

Should You Convert to a Roth IRA? (Part 2)

Should You Convert to a Roth IRA? (Part 2)

As I pointed out in my most recent blog, I am not quite sure how many parts this series will end up containing. My intention is to discuss the salient points that you, as an investor, must understand and take into consideration as you decide whether or not converting to a Roth IRA is something that will benefit you and your family. As a result, I will focus on only one or two areas per blog post.

This is what I know for sure: You will receive factual information presented in a clear, simple, unbiased manner.

Is It True That Only Traditional IRAs Can Be Converted?

There seems to be a lot of misinformation out there, one of the significant distortions being that you must first convert your investment into a traditional IRA, and then into a Roth. In reality, basically any qualified plan may be converted. Qualified plans are those into which you deposit before-tax dollars and defer taxes on the growth as well. Examples include traditional IRAs, 401(k)s, 403(b)s, and tax-sheltered annuities.

Must My Employer Allow Me to Convert My Work-Related Funds?

Although the law permits you to convert and you may want to, your employer’s retirement plan policy supersedes everything else. Most employers’ policies do not allow the transfer of retirement plan funds while you are still employed by that establishment.

For instance, say George has accumulated $400,000 in his employer’s qualified 401(k) program. Now George wants to convert all or a portion of his funds to a Roth IRA; however, his employer’s policy does not allow any transfers unless he is no longer employed at the firm. That’s tough luck for George unless, of course, he resigns.

How Is the Transfer Made?

The transfer can happen in one of two ways:

  1. You may request that your current fiscal custodian transfer the funds directly to a new Roth custodian.
  2. You may request that the funds first be released to you, and you then turn them over to your new Roth custodian. However, if you use this indirect approach, the new account must be set up and the money deposited into it within 60 days.
Are There Minimum and Maximum Amounts That Can Be Converted?

The amount you convert is completely up to you. You alone make that decision. The “new” law is not an all-or-nothing situation. I must tell you, though, that most investment firms require their own minimums to maintain an account with them, but those limits have nothing to do with the law. And I can virtually guarantee that you needn’t worry about the maximum amount.

Say Sarah has $100,000 in her traditional IRA. She may decide to convert $5,000, $10,000, all $100,000, or any amount in between.

Is 2010 the Only Year That Such Conversions May Take Place?

As the law stands now, you may convert beyond 2010. Of course, just like any other laws, Congress may suddenly decide to change or repeal it at any time. More to the point, this is one of the primary areas where investors are receiving misinformation and being rushed into making decisions, some of which are not financially savvy.

As I laid out in Part 1 – please read it if you have not done so already – these conversions have been available for the past 13 years, so any advisor who is behaving as if you are doomed if you don’t do it now is, frankly, projecting a false sense of urgency, and I would be very careful dealing with such folks. The more interesting and more important question is where has your advisor been all these years?

Having said that, as a retirement planner, I understand the power of time and compounding, so I’d want my investors to take advantage of good opportunities that will enhance their wealth as soon as possible, BUT only after performing proper due diligence.

If you would like FREE assistance in determining how YOUR numbers play out in your decision-making process, call us at (301) 949-4449 to give us some quick information, and we’ll send you a year-by-year analysis of YOUR numbers.

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