Roth IRA conversions for retirees

The Roth IRA conversion received a lot of attention when it was first made available several years ago.  But now, a lot of investors who should be converting their traditional IRAs into Roth IRA's aren't doing so.  To refresh your memory, if you meet the income requirements, you can convert money that is in a traditional IRA into a Roth, and beginning in 2010, the income restrictions are eliminated, so anyone with a traditional IRA will be able to convert all or part of it to a Roth IRA.  While you have to pay taxes to do so, the advantage is subsequent withdrawals from a Roth IRA will probably be tax-free.  

But as good as a Roth IRA conversion is for most, it is not appropriate for everyone.  Here are some considerations:

  1. Can you afford to pay the taxes due on the conversion with non-retirement money?  If you will need to tap into retirement account assets to pay the taxes, you shouldn't do the conversion.  Paying taxes and, perhaps, penalties to use retirement money to pay the taxes doesn't make financial sense.
  2. Do you expect to be in the same or a higher income tax bracket during your retirement years?  If you anticipate being in a lower tax bracket, you're better off avoiding the taxes due on the conversion now when you're in a higher bracket and paying the taxes when you're retired at a lower rate.
  3. Will you be able to wait at least ten years before withdrawing money from the converted Roth?  The longer you allow the money to grow tax free, the better, but in no case should you plan to withdraw money within the first ten years after the conversion.