Roth IRA conversions can be expensive. If you have $200,000 in a traditional IRA, converting the entire account means picking up $200,000 in additional income for 2008. Assuming an effective 30 percent tax rate (federal and state), you’d owe $60,000 in tax.
You would not have to convert the entire $200,000 in 2008, though. Instead, you could convert a part of your traditional IRA to a Roth IRA and owe tax only on the amount you convert. If you convert $40,000, for example, your tax obligation from the conversion might be only $12,000.
Then you might convert another $40,000 in early 2009. If the stocks and stock funds in your traditional IRA are still depressed, you will owe relatively little tax for that conversion in 2009. Moreover, you won’t have to pay that tax until 2010, when you file your 2009 tax return. In the meantime, you will have transferred a large portion of your traditional IRA to a Roth IRA, where any profits eventually can be withdrawn, tax-free.
In 2008 and 2009, Roth IRA conversions are available only if your annual income is no more than $100,000.
