Should I convert an IRA to Roth IRA ?

[Guest Mae]

I'm 64 I have an IRA that is made up of a Small Cap Stock. It's worth now is 4111.00. At one time it was worth almost 6000.00. I don't intend to cash this out, because I don't need the money as of now or maybe never. I can afford to pay the tax on this money if I decide to convert it to a ROTH IRA. Would it be to my advantage to do so and also my boys advantage? Mae

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Mae

[John G]

You should know that small cap stocks have been depressed for about one year. All those stock market records have come from the 100 or so biggest companies, new internet firms or other "technology" companies.

One of the benefits of a Roth is that there are no mandatory distributions when you hit 70. If you do not plan to tap into this money and assume that it will be left in your estate, then the tax shelter will extend a long time. You would like to convert the regular IRA in a year when your taxes are low. If your not yet retired, then waiting a couple of years may be advantagous.

You are correct that you want to use non-IRA funds to pay the taxes. This maximizes the assets kept in the tax shelter. If your estate is over 650,000 then this strategy also reduces estate taxes, since the overall size of your estate shrinks by the amount of taxes paid. For the amount you described, this would be a negligible benefit.

You mentioned "my boys". One thing that you might want to consider if you have surplus funds is to start Roth IRA accounts for any children or grandchildren if they do not have any or do not fully fund their IRAs. You can utilize the annual $10,000 transfer allowance. This also reduces your estate and may stimulate lifelong investing habits.

When you convert a regular IRA, you subtract any non-deductable contributions that were made to your IRAs. For example, if you made non-deductable contributions of 2,000 in two different years, then you would only pay the tax on $111 ($4111-2000*2=111)if you convert to a Roth. (Note, the IRS calculation requires that all IRAs are pooled together and the non-deductable portion is the fraction of the total. You can't cherry pick one account or mutual fund.)