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Answer: Thanks for the question. There's been much talk about Roths lately for two major reasons. First, the income limitations have been lifted and starting in January 2010 any investor can convert a traditional IRA to a Roth IRA regardless of their level of income. Second, many retirement accounts have lost value in the last two years and therefore, there may be less tax to pay on the conversion.

Let's be honest. The tax-deferral afforded by putting money into retirement plans is the ultimate deal with the devil, aka the IRS. That's because you and Uncle Sam co-own the assets. As they grow, Uncle Sam's share grows as well. As your partner, he's happy to wait for his payout once you distribute the money. Worse yet, in an environment of likely rising tax rates, Uncle may really make out on your deferral. Conversion to a Roth IRA breaks the "partnership" by paying up your deferred taxes. However, once done, the beauty is that you don't need to ever share your future accumulations with your greedy ex-partner. "Pay tax on the seed and watch the tree grow tax-free forever".

Virtually all of our clients are candidates for Roth conversions because they will be leaving a financial legacy to their families. Conversely, a Roth may not make sense for those investors that may need to use their IRA or 401k to fund their retirement. By converting and paying taxes now, investors accomplish three things; they lock in the tax rate on the accumulated earnings to the conversion date, they eliminate required minimum distributions on the funds, and they create an investment fund that grows tax-free for the lifetime of their beneficiaries.

Here's a quick example: John and Mary are 72 years old. They have $500,000 in an IRA account. As part of their other assets, they have $175,000 of liquid investments. They have two children that are 47 and 43 and four grandchildren that range from 12 to 18. They don't need distributions from the IRA or the $175,000 of outside assets to fund their retirement. Lastly, they expect that all of the IRA could go to their children and/or grandchildren upon their deaths.

If they convert to an IRA in January of 2010, they could pay tax of roughly 35% on the $500,000. They also have the option to pay ½ of the tax with their 2011 return and ½ with their 2012 return.

Once converted, they no longer have any requirement to make minimum required distributions from the Roth IRA. Assuming that John and Mary pass away 20 years from now and the funds grow at 6% per year (again tax-free), their Roth IRA could be worth roughly $1.5MM at that time. At that point, the beneficiaries are required to take distributions over their lifetimes, all of which is tax-free. Assuming the IRA is left to the children and the children are now 65 years old, they are required to take the distributions over the next 21 years. The children would receive $2.8MM tax-free. If they left the Roth IRA to their grandchildren, for example, the grandchildren could withdraw the money over a longer time frame, perhaps 52 years, and therefore receive $9.7MM tax-free.

Yes, Roths, in the right circumstances, are well worth it. They can provide the best legacy one could leave. Income that is tax-free is the best income of all. Please give us a call if you would like to talk about Roth conversions.