Roth IRA conversion not for everybody
Conversion from traditional account has long-term advantages but initial tax hit can be a hurdle
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One of the best uses of a Roth is for estate planning: Converting an IRA to a Roth and handing it down to a child or grandchild means your heirs will be able to access that money tax-free.
“If you’re at an age where you can go into a lower tax bracket and clean that money, that goes tax free for the rest of your life but is a phenomenal gift for your heirs—a tax-free inheritance,’’ Hobart said.
Roth IRAs also feature an escape hatch if, after the conversion, the account loses a lot of money because either the investor was too aggressive or the market had a rough period. Say a converted Roth of $100,000 craters and now has only $50,000, investors are allowed to “reconvert’’ the Roth back into a traditional IRA and recover the tax payments made during the initial switch.
There is, however, a limited window for reconversions: Oct. 15 of the year following the initial conversion. Financial advisers said reconversion can be common; Jacobs said several clients reconverted in October 2011 after shaky market performance flattened their earnings last summer. If investors are that risk averse, it may be best to avoid Roth IRAs altogether. “It’s not a one-size-fits-all opportunity and there are certain situations where a Roth conversion is not appropriate,’’ Jacobs said.
Jason Notte can be reached at email@example.com.