This year may be an excellent time for a Roth IRA conversion. With asset values down, you will owe less tax when you convert a traditional IRA to a Roth IRA.
Suppose Jim Williams had $50,000 in a traditional IRA in early 2008. If Jim is in a 25 percent tax bracket, converting his IRA to a Roth IRA then would have cost him $12,500 in tax: 25 percent of $50,000.
Now Jim’s traditional IRA is worth only $30,000, after the stock market slide. A Roth IRA conversion now would cost him only $7,500 in tax: 25 percent of $30,000. So Jim would save $5,000 in tax on a Roth IRA conversion, in this example.
If you are considering a Roth IRA conversion, look over your latest tax returns to see whether you had attached Form 8606, which shows the total of non-deductible contributions to a traditional IRA. Such contributions will reduce the tax you’ll owe on a Roth IRA conversion.
Say that Jim’s $50,000 IRA includes $5,000 of non-deductible contributions. Then only $45,000 of his conversion would be subject to income tax.
To convert a traditional IRA to a Roth IRA in 2009, your income must be $100,000 or lower, whether you file as a single taxpayer or a married couple with a joint return.
