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What to consider before converting to a Roth IRA

The benefits of converting to a Roth IRA are clearest for the wealthy. Many others should proceed with care.

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Chris Leach had been gearing up to seize on a financial opportunity – the chance to switch retirement savings to a Roth IRA this year – until he drilled into the fine print.

The family does now qualify: Starting this year, taxpayers with incomes of $100,000 or more can convert assets from standard IRAs, or even 401(k) or 403(b) retirement plans, to a Roth IRA.

But Mr. Leach's probe turned up blinking yellow lights. He found that such a conversion – which would boost his taxable income in the year he completed it – could scotch his eligibility for a tuition tax credit on his son's college costs. Taxes posed another quandary: "Did I want to commit to the current rates when I expect to be in a lower tax bracket when I retire?" asks Leach, a finance professor at the business school of the University of Colorado at Boulder.

His new thinking: "If I do a Roth IRA conversion [from a 403(b) account still in a former employer's retirement plan] it will only be a modest one," he says. "A Roth IRA conversion this year isn't the 'opportunity of a lifetime' people might have thought from all the hoopla about it."

Six months into the start of the expanded opportunity to convert to a Roth IRA, Americans aren't exactly rushing to sign up. Only 14 percent of respondents were considering switching standard IRA assets to a Roth IRA this year or next, according to an April survey by Boston-based Putnam Investments.


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