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Answer:
Dear
Steve,
For
the absolute final opinion, you should check with
your accountant, as I don't have enough facts about
your particular situation to give you a definitive
"yes" or "no".
But
here are several points to keep in mind and to discuss
with your adviser.
Low
tax rates & budget deficit
When
converting from a Traditional to a Roth IRA, you must
cough up taxes on the amount. You have up until December
31 to convert for this year and the taxes are due
April 15, 2005.
However,
due to the tax cuts enacted by Congress with President
Bush's urging and approval, the rates on most income
brackets are now quite low -- lower in many cases
than they've been in years. So, by making the conversion
now, you can take advantage of the low rates we're
all enjoying.
Another
reason to convert now rather than later is that the
nation has a record deficit -- around $477 billion
-- and it's climbing. The deficit is due largely to
the war in Iraq followed by the new Medicare drug
benefits.
Eventually
that deficit will have to be covered and eventually
that means a hike in taxes.
The
facts
You
say that you own the original type IRA, usually referred
to as a Traditional IRA. That means you have
not been paying taxes on the money you've been putting
into the account. On the other hand, you will be required
to pay taxes when you start taking out money, which
you can begin doing at age 59 1/2.
If
you convert to the newer Roth IRA, your withdrawals
from that account will be tax free, although future
funding of the account will be done with after tax
dollars.
Who
should convert
Because
you're leaving your money to a younger person, conversion
to a Roth makes good sense. Your heir, in fact, will
be able to accumulate tax-free gains for life.
There
is a slight down side. Your heir will have to start
taking tax-free withdrawals upon your death, regardless
of his age. However, the required distributions are
based on life expectancy so the amount for a young
person would be fairly small.
Caution
You
didn't mention your income. It's important to be aware
of the income ruling -- whether one is single or married
filing jointly, in order to convert to a Roth, you
cannot have a modified adjusted gross income of more
than $100,000. That dollar amount applies specifically
to the year of conversion.
For
More Information
Because
of all the variables involved in this decision, I
recommend that you crunch the numbers through one
of the online tools. My favorite is at: www.dinkytown.net.
Good
luck!
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