Converting a Traditional IRA to a Roth IRA

Converting a traditional IRA to a Roth IRA makes sense if you believe you will be in the same or higher tax bracket when you retire. Considering the current budget deficit and the Bush tax cuts expiring in 2011, we all might see higher tax rates in the future.

There are restrictions in place that bars anyone making over $100,000 per year from converting to a Roth IRA but those restrictions will be history starting in January 2010.

When you convert to a Roth IRA you won’t pay a penalty but you will have to pay taxes (at your current tax rate). Ah, but when you retire, any money you withdraw from a Roth IRA is tax-free because you already paid taxes on the money deposited.

Other benefits of a Roth IRA over a traditional IRA include the fact that you don’t have to start making mandatory withdrawals after age 70¹⁄². Money withdrawn from a Roth IRA doesn’t count towards determining if any of your Social Security benefits are taxable.