Should You Convert to a Roth IRA? (Part 2)
February 22, 2010
by Samuel N. Asare, MBA, CRPC, CMFC
As of last month’s writing we were estimating this to be a three-part series. However, upon a closer look, we are not quite sure how many parts the series will end up containing. Our intention is to discuss the salient points that you, as an investor, must understand and take into consideration as you decide whether or not converting to a Roth IRA is something that will benefit you and your family.
Is It True That Only Traditional IRAs Can Be Converted?
There seems to be a lot of misinformation out there, one of the significant distortions being that you must first convert your investment into a traditional IRA, and then into a Roth. In reality, just about any qualified plan may be converted. Qualified plans are those into which you deposit before-tax dollars and defer taxes on the growth as well. Examples include traditional IRAs, 401(k)s, 403(b)s, and tax-sheltered annuities. However, non-spouse heirs who inherit traditional IRAs cannot convert them to inherited Roth IRAs. Also funds from a SIMPLE IRA that is less than two years old cannot be converted to a Roth.
Must My Employer Allow Me to Convert My Work-Related Funds?
Although the law permits you to convert and you may want to, your employer’s retirement plan policy supersedes everything else. Most employers’ policies do not allow the transfer of retirement plan funds while you are still employed by that establishment.
For instance, say George has accumulated $400,000 in his employer’s qualified 401(k) program. Now George wants to convert all or a portion of his funds to a Roth IRA; however, his employer’s policy does not allow any transfers while he remains employed at the firm. That’s tough luck for George unless, of course, he resigns.
How Is the Transfer Made?
The transfer can happen in one of two ways:
- You may request that your current fiscal custodian transfer the funds directly to a new Roth custodian.
- You may request that the funds first be released to you, and you then turn them over to your new Roth custodian. However, if you use this indirect approach, the new account must be set up and the money deposited into it within 60 days.
Are There Minimum and Maximum Amounts That Can Be Converted?
The amount you convert is completely up to you. You alone make that decision. The “new” law is not an all-or-nothing situation. We must tell you, though, that most investment firms require their own minimums to maintain an account with them; however, those limits have nothing to do with the law. And we can virtually guarantee that you needn’t worry about the maximum amount.
Say Sarah has $100,000 in her traditional IRA. She may decide to convert $5,000, $10,000, all $100,000, or any amount in between.
Is 2010 the Only Year That Such Conversions May Take Place?
As the law stands now, you may convert beyond 2010. Of course, just like any other laws, Congress may suddenly decide to change or repeal this law at any time. More to the point, this is one of the primary areas where investors are receiving misinformation and being rushed into making decisions, some of which are not financially savvy.
As we laid out in Part 1 - please refer to last month’s edition - these conversions have been available for the past 13 years, so any advisor who is behaving as if you are doomed if you don’t act now is, frankly, projecting a false sense of urgency, and you would be well advised to be very cautious dealing with such folks. The more interesting and more important question is where has your advisor been all these years?
Having said that, as retirement planners, we understand the power of time and compounding, so we’d want our investors to take advantage of good opportunities that will enhance their wealth as soon as possible, BUT only after performing proper due diligence.
Thurmont Times readers requiring assistance in determining how their Roth conversion numbers play out may request a free, no-obligation consultation by calling (301) 949-4449 or visiting www.LaserFG.com
A senior financial strategist with Laser Financial Group, Samuel is an accomplished personal finance expert, a Chartered Retirement Planning Counselor, and author with years of experience in retirement-tax planning. He regularly contributes to and is featured by various media outlets, including TV and radio.
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What a lovely story.
How blessed Lily was to have such a loving family and how blessed the family is to have Lily in their life.