Under the new tax law, income tax rates are unchanged from 2010. That will be the case in 2011 and 2012. Today’s income tax rates are relatively low by historic standards.
Therefore, you might want to convert your traditional IRA to a Roth IRA, this year or next. Roth IRA conversions generate income tax. However, the tax rate you’ll pay for 2011 or 2012 may wind up being much lower than future income tax rates.
After a Roth IRA conversion, all withdrawals are tax-free once five years have passed and once you reach age 59-1/2. Therefore, Roth IRA conversions now make sense if you think tax rates will go higher.
Also, Roth IRAs have no required minimum distributions. If you don’t need to take withdrawals, you can leave a large tax-free account to your beneficiaries. The new law created a $5 million exemption from federal estate tax, at least for the next two years, so an intact Roth IRA may pass to your children or grandchildren, free of estate tax as well as income tax.
