Wednesday, March 31st, 2010
You’ve probably heard the news that this year, regardless of your income, you now have the option of converting some or all of your IRA investments to a Roth IRA .
The question is, should you?
If you’re planning on leaving this money to your heirs, the simplest, most obvious answer to this question is yes. If you can pay the extra income tax using non-IRA money. At least, I think that’s what the media will tell you. After all, if you’re not planning to use the money during your lifetime, a Roth IRA will enable you to escape the yearly required minimum distribution requirement that comes with a traditional IRA once you reach age 701/2.
In other words, what’s not to like?
As with all good things in life, there’s a catch to the Roth IRA. Or in this case, a few catches.
If you convert to a Roth, you’re going to voluntarily increase your income tax liability and pay more taxes than necessary today. In the hopes of paying fewer taxes later on, maybe due to a tax rate increase that seems almost inevitable.
But here’s what most people are forgetting about. The extra taxes you pay now is also money you no longer have invested earning interest. This is called ‘opportunity cost’. So make sure you net the ‘lost opportunity’ of earning interest on that money before you jump to convert some of your IRA money.
And don’t forget, if you convert your IRA money to a Roth IRA that money has to stay in the account for a full 5 years. If you need the money before that time for any reason, you’ll pay regular income tax and 10% penalty for any earnings you take out.
But my biggest concern…I can’t help feeling a little skeptical about the long-term promises of the Roth IRA. If you convert to a Roth IRA, the government gets more tax revenue now, but it’s all being paid for by forfeiting future tax revenue. If at some point down the line, the government is looking for a new source of tax revenue; I think all those Roth IRAs are going to present a pretty tempting target. And if yours has been passed on to your children or grandchildren, they may have to pay the price.
Do I know this is going to happen? Of course not. But I do believe it’s a risk, and something to think about when the pressure is on to convert to a Roth IRA.
For more information on this subject, or for any other questions about retirement planning, please feel free to visit my website at www.brianfricke.com.
Tags: brian Fricke, certified financial planner, finance, financial advisor, Financial Management Concepts, financial planner, Financial planning, retirement, retirement planning
