What will we have to pay to convert my husband’s traditional IRA to a Roth IRA?

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• • Individual Retirement Account (IRA)
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Q. What will we have to pay to convert my husband's traditional IRA to a Roth IRA?

A. Earnings and deductible contributions in the traditional IRA will be subject to federal and state income taxes when you make the conversion to a Roth IRA.

For 2010 only, you can choose to postpone the tax and pay it in equal installments on your 2011 and 2012 tax returns. Or, if you wish, you can pay the entire tax when you file your 2010 return.

Since the earnings and deductible contributions will be treated as taxable income, it's possible that a large conversion would push you into a higher tax bracket and increase the tax on the converted amount.

To minimize the tax bite for any one year, you might consider doing partial conversions over several years. This gradual approach has its downside, since income tax rates today are unusually low and could rise over the next several years. Improving financial markets could also raise the value of your account, and consequently, the taxes you owe.

While Roth IRAs have a number of attractive features, converting from traditional IRAs isn't for everyone. It makes the most sense when:

• You anticipate that your tax bracket in retirement will be higher than it is now. The issue here is whether it is worthwhile to pay the taxes up-front today for the ability to make tax-free withdrawals from the Roth IRA during retirement.
• You can pay the tax bill from a separate taxable account. If you hold out some money from the traditional IRA to pay the tax bill, you'll likely owe a 10% early distribution penalty on that amount if you are under age 59½. You'll also have less money compounding tax-free in the account.
• You're fairly certain you won't need the money for at least five years. If you're under age 59½ and have held the Roth for less than that amount of time after the conversion, any money you take out may be subject to a 10 percent early distribution penalty.
• You want to leave as much as possible in the account to heirs and do not plan on using it for living expenses. Traditional IRAs require account owners to begin taking minimum distributions at age 70½, which reduces the size of the estate, and what's left will be subject to taxation. There are no such distribution requirements for a Roth IRA, and beneficiaries can receive the entire value of the account tax-free.

These are just guidelines.

This Roth IRA conversion calculator can help you make a decision by figuring out exactly what the costs and taxes will be for converting your traditional IRA to a Roth.

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