After the worst stock losses in decades, now may be the ideal time to convert a traditional IRA to a Roth IRA, tax advisers say.

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After the worst stock losses in decades, now may be the ideal time to convert a traditional IRA to a Roth IRA, tax advisers say. Investors with stocks or stock funds in their IRAs will likely owe less tax than they would have when the market was strong. The S&P 500 is down more than 40 percent in the past year. What’s more, advisers say, tax rates may be as low as they will be for some time.

Traditional IRAs are funded with pretax dollars so investors must pay taxes when they make withdrawals. Roth IRAs are funded with after-tax dollars. Withdrawals, which aren’t mandatory, are tax-free.

To be eligible to convert to a Roth, adjusted gross income can’t exceed $100,000, whether you’re single or married and filing a joint return. That income limit disappears in 2010. People who have lost their jobs may find themselves in a lower tax bracket, which reduces income taxes owed on a conversion. The trouble is, these investors might not be able to afford the tax hit, says Julian Block, a New York-based tax adviser, but a partial conversion is an option.

“It’s a question of psychology,” says Paul Dinzeo, a principal at Accredited Investors in Minneapolis. It’s a good long-term strategy, but those out of work are more likely concerned with the here and now, he says.

Jacob Wolkowitz, an analyst at Accredited, says more clients are converting to Roths. “We may have had one or two of these conversions all of last year, while now I’m seeing one a day.” Dinzeo says the ideal candidate has cash outside the IRA to pay the tax, and a long enough time horizon for investment gains to compensate for the taxes. Block says tax issues are complex and suggests consulting a professional.

If you convert to a Roth and the market sinks, you can “recharacterize” the fund back to a traditional IRA, and convert to a Roth again later, so you’ll owe less tax. Retirees who don’t expect to need funds from an IRA may consider converting as well, advisers say, as they can pass Roth IRAs, which don’t require withdrawals, to their heirs.

The Associated Press