We’ve fielded quite a few questions lately about converting a regular IRA to a ROTH IRA. The financial media is portraying Roth IRA conversions as a “no-brainer.” It isn’t quite that clear and depends on events that you may not be able to foresee or control.
Roth IRA Conversions are being pushed forcefully by the brokerage community (read salespeople who do not get paid until you act). This tax law is a golden goose to them, but only if you move your investments.
Before you take action on converting any IRA to a ROTH IRA, please read the article at the following link: ROTH Conversions: The Gamble of a Lifetime, at Investment News.
The value of the article is that it provides an examination of the other side of the argument as to why you should not consider converting your IRA to a Roth IRA. Are the author’s arguments correct for all investors? Of course not. Neither is conversion. You will be better positioned to make a good decision, if you know both the positives and negatives of making a conversion.
There is only one point I disagree with in the whole article. The author says there is no guarantee income tax rates won’t go up. No chance of that. The government has $70 TRILLION of unfunded liabilities. Not only will the Federal, State and local governments raise your taxes, it won’t be pretty… Will we have higher taxes for more than 10 years? 20 years? 30 years?
So, here’s my take on each argument in the article:
- Taxes: higher taxes seem a certainty, but not necessarily. Taxes were lowered under President Reagan and it could happen again.
- Future changes in the Roth Tax Law: Again, never say never. If things are so bad that you want to pay your taxes in advance, are they not so bad that lawmakers could change the law to raise more tax revenue? It’s what they do. Is it likely? Who knows at this point?
- The argument that a converted Roth IRA is better than a traditional IRA: you are giving up investing the portion of your IRA that will some day belong to Uncle Sam. If you do this, you will be investing less and have less opportunity to use “his” money to make money.
- Future tax planning: “Therefore, all future income from a Roth used by your clients to make charitable contributions, pay medical bills, long-term-care expenses, mortgage interest or property tax does not receive the same marginal tax deduction as does income received from an IRA. Nor does the client receive income from tax credits. Basically, future tax savings with an IRA are negated once the Roth IRA conversion takes place, because the client paid all taxes upfront.” I couldn’t have said it better, so I am quoting the author.
- Estate-planning objectives: get good estate planning advice and realize that once you make the conversion, you are giving up the option to do other things with your IRA.
- The impact of future medical and long-term care needs on tax rates: Andrew Rice writes, “…the major reason to have an IRA versus a Roth IRA is a client’s future need for medical expenses, long-term- care or assisted-living coverage. He gives an excellent example of how converting to a Roth IRA could impact future effective tax rates.
Having said all that, the author of the article makes a compelling case about why you DON’T want to make the conversion – or at least why you should think carefully before you act. After reading the article and giving it a lot of thought, I think he raises a series of valid concerns. I am bringing it to your attention for your consideration. At the very least, you may want to hedge your bets by not converting the whole thing.
Here is the link again: Roth Conversions: The Gamble of a Lifetime.
It is also worth noting that what you do to invest that IRA – whether a Roth IRA or a regular IRA or a Rollover IRA – will decide whether it grows steadily or shrinks in the bear market. In fact, if you do the Roth IRA conversion, how you invest your IRA will even be more important. You will no longer have the “government’s share” of your IRA to invest.
If you found this page through a search engine, you are probably considering a Roth Conversion of your standard IRA. Don’t miss that there is a much, much larger issue at stake with your IRA – Roth or otherwise: the investment strategy of your IRA. If you do not yet know how we invest money, the depth of research that goes into all Great Portfolio Management, and the multi-dimensional strategy involved, I suggest you make sure to visit this link while you are here: Great Portfolio Management.
