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Whether or not to convert to a Roth IRA may depend on future tax rates
Posted August 14, 2009
In year 2010, the restrictions on Roth IRA conversions will be permanently eliminated. One of the considerations in deciding whether to convert to a Roth IRA is income tax rates. If you convert a traditional IRA to a Roth IRA in 2010, the income tax due on the conversion could be paid in 2011 and 2012, or it could all be paid in 2010. Will income tax rates be the same, lower or higher in 2011 and 2012?
Today the top income tax bracket is 35%. As recently as 1980 the top bracket was 70% and it 1950 it was 90%.
We have all read about the federal budget deficit but not much has been written about individual states' budget deficits.
The Nelson A. Rockefeller institute reported that state personal income tax collections dropped 26% nationwide through the first four months of this year compared with a year ago, putting many states' already shaky budgets into deeper trouble. State income tax collections in the first four months of this year fell about $28.8 billion, compared with the same period last year, the institute said.
States will likely be forced to consider further spending and revenue actions in 2010 and will confront large gaps when federal stimulus assistance ends in 2011.
When making a tax decision on converting a traditional IRA to a Roth IRA you should consider your personal income tax situation: will your tax rate be the same, lower or higher in the future? If the answer is the same or higher, conversion might be appropriate for you. If conversion is appropriate for you in 2010, then you must consider what tax rates will be in 2011 and 2012 and what your personal income tax bracket may be. Will they be higher?
Income tax rates, however, are only one important consideration in deciding to convert from a traditional IRA to a Roth IRA.
Ed Slott and Company has been called "The Best" sources for IRA advice by The Wall Street Journal, and "America's IRA Experts" by Mutual Funds Magazine. Ed is a widely recognized professional speaker and author. The company’s website is IRAHelp.com.