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The plunge in the stock markets provides a great opportunity to review your IRA. If it has been devalued, consider converting to a Roth IRA. You can do this in any calendar year in which your income is not over $100,000. You will owe income tax when you convert which is determined by the value of the IRA at the time of conversion. Thus, if the downturn over the past year has dropped your IRA’s value from say $100,000 to $70,000 and you are in a combined federal and state effective tax bracket of 33%, you’d owe $23,333 in additional tax in 2001 (33% of $70,000). Had you converted when the value was $100,000, you would have owed $33,333 (33% of $100,000). Thus the market slide saves you $10,000.

Why convert a regular IRA to a Roth IRA and pay $33,333 or $23,333 this year instead of later? The answer is the very large potential benefits the Roth can provide in the future. To be entirely tax free, you must not take distributions for five years and before you are 59˝. With a regular IRA all the money will have to be withdrawn on a schedule that generally commences when you reach 70˝. Unlike a Roth IRA, all withdrawals (with limited exceptions) will be subject to income tax at your highest tax rate. If you meet the five-year, 59˝ age tests you can withdraw unlimited amounts from a Roth IRA and pay no income tax. You have paid the tax at the time of conversion.

By converting when the market is depressed and paying tax currently based upon the present lower value, you will reap the rewards later when the market rebounds, as it always has. Therefore, if you’re in no hurry to withdraw the money from your Roth IRA, you can leave it in as long as possible for continued tax deferral. Roth IRA’s impose none of the required minimum lifetime distributions that regular IRA’s do.

I would be most happy to discuss this matter with you and evaluate your potential benefits.

 



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