Now could be the time to convert your IRA
The seesawing stock market can have one small upside -- a smaller tax bill if you convert a traditional IRA to a Roth IRA.
Since you contributed pretax dollars to a traditional IRA, you must pay ordinary income taxes on your contributions and any earnings when you convert to a Roth IRA. That's because Roth IRAs require contributions of after-tax dollars.
Converting when your IRA is worth less means you owe less tax.
Let's say you're in the 28% tax bracket and converted your traditional IRA back when it was worth $45,000. You'd owe $12,600 in taxes. But if your IRA is only worth $30,000 now, the tax bill would be only $8,400.
This year, the income limit on converting a traditional IRA has been removed. So anyone can do it, no matter what their adjusted gross income. An added perk is that you can pay the taxes on the conversion in two equal installments in 2011 and 2012.
The risk is that if the stock market is on a rebound, you'll pay more in taxes.
Also, remember that a Roth IRA isn't for everyone.
It only makes sense if you think you'll be in a higher tax bracket when you retire or you're still 20 or 30 years from retirement and have enough time to rack up significant earnings.
That's because all types of earnings in a traditional IRA are taxed upon withdrawal. Earnings in a Roth IRA are not.
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