Monday, March 1, 2010

Should You Convert to a Roth IRA? (Part 5)

Should You Convert to a Roth IRA? (Part 5)

In this final discussion on Roth Conversions – at least for now – I offer my professional opinion on two critical issues.

Why the sudden push for Roth Conversions?

As I have stated previously, these conversions are not entirely new: Roth IRAs have been around since 1997. Finding it was in their best interests, Laser FG has helped numerous clients do what we call Strategic Conversions for more than a decade!

For one thing, as long as your MAGI was less than $100,000, you did not need to wait until the new law that became effective on January 1, 2010 to do such a conversion.

Now, the much larger issue is that regardless of your MAGI, you could have achieved similar benefits by using what I call “Roth on Steroids,” if you were to max-fund a policy within the limits of the Internal Revenue Code sections 7702 and 7702A.

So financial professionals who really knew their business would never have advised you to wait for this "new" law.

Is it really a bad idea to pay taxes due on the conversion from the balance of your existing qualified plan?

Much of the literature I have seen on this topic completely frowns on this idea, when, in fact, I think that should not be the case at all. I believe if you are beyond the age where you’ll not incur penalties for early withdrawal, it may be worthwhile to pay the taxes due from your existing balance. People who consider these conversions believe that their future tax rates are going to be higher, so if you’ll have a decent enough return to warrant the conversion, why not?

If you go by what most so-called advisors are saying, and hold off converting – when, in fact, you could have benefited by doing so – and keep your money in qualified status, sooner or later you’ll voluntarily withdraw those funds or the IRS will force you to do so. When that happens, guess what you’ll have to pay? Taxes! And note that this will happen in the future, when most people believe tax rates will be higher.

As usual, it behooves you to consult a savvy advisor who also applies a ton of common sense to help you assess your specific situation. As I mentioned earlier, we have been doing these strategic conversions for over a decade, so this new law is no news at all to our clients.

Get a free, no-obligation review of your situation by calling (301) 949-4449 or visiting

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