Assets in a Traditional IRA or 401(k) grow tax-deferred and distributions are taxable at ordinary income tax rates. A Roth IRA grows tax deferred and distributions are tax free.
By converting your assets to a Roth IRA, you’ll be paying your tax liability now – at a potentially lower rate-in exchange for tax-free growth and tax-free distributions in the future. If you make the conversion in 2010 you can spread the tax bill out equally over two years (your 2011 and 2012 tax returns). This special two-year provision is only available to conversions made in 2010.
Unlike a traditional IRA, the government does not mandate you take required distributions from a Roth account. Therefore, you can let the entire account grow tax-deferred for as long as you wish.
If you have enough wealth to be concerned about estate taxes, converting to a Roth may provide an additional benefit to you.
There are other issues to consider before deciding if converting is right for you. A good place to start the conversation is to talk with your financial advisor. If you do not have an advisor or are thinking about hiring a new one, I’d love the opportunity to visit with you.