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Potential Benefits of Converting to a Roth IRA

There has been a lot in the financial press on the topic of ROTH IRA conversion. Perhaps you've heard that conversion might be a good idea, but what are the pros and cons and what do you need to know?

Help Minimize Taxes, and Potentially Increase Retirement Savings

We believe that many investors should consider having a Roth IRA as part of their overall retirement plan because they offer tax-free growth potential, which can help minimize taxes and increase retirement savings. But Roth IRAs have income restrictions; it might not be an option for everyone at this time.

Income Limits Have Been Removed

There's good news. If you've been shut out of a Roth IRA because your income is too high, you now may finally be able to have one. On January 1, 2010, the income limits for converting traditional, rollover, SEP, and SIMPLE IRAs, and 401(k) or other workplace savings plans with former employers, to a Roth IRA were removed. Before this change, only people-single or married and filing jointly-with modified adjusted gross incomes of $100,000 and below could convert. (There are still income limits for contributing to a Roth IRA in 2010 and beyond.)

Choosing to Convert

The decision to convert is different for everyone based on one's specific circumstances. You should seek the advice of your tax advisor prior to conversion. In general, it may make sense to convert if you:

  • Expect higher taxes in the future - you may benefit by paying taxes at today's rates in exchange for tax-free withdrawals during retirement.
  • Have a long investment time horizon. The benefits of conversion are likely to increase the longer you money stays in the Roth IRA. You should have at least five years to go before you intend to take distributions. If you are in the ROTH for less than five years there may be penalties for withdrawal.
  • Can pay taxes on the conversion. You will have to pay income taxes on the dollar amount you convert. You should avoid using your IRA money to pay taxes due on the conversion. It is best to use other savings held in non-retirement accounts to pay the tax liability.
  • Want greater flexibility managing your retirement withdrawals. There are no Mandatory Minimum Distributions on ROTH IRAs.
  • Plan to pass the majority of your retirement assets to your beneficiaries. Distributions upon your death remain tax-free.
  • Have IRA assets consisting entirely or mostly of non-deductable (or post-tax) contributions.
  • Expect lower than usual income in 2011.

Assistance Awaits You

While a conversion does finally allow many high-income investors the opportunity to have a Roth, it's important that you analyze your situation and consult a tax professional. It does ultimately come down to your assessment of the tax cost. How much tax will you pay if you convert now versus what you expect to pay when you withdraw the money during retirement?

If you would like to explore your own situation further you may contact our CFS* Financial Advisor, Stephen Seewer, by calling (415) 674-4846 or emailing

*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (CFS), a registered broker-dealer (Member FINRA / SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. SF Fire Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.