Converting to a Roth IRA in 2010MorningstarRachel Haig: Im Rachel Haig for Morningstar.com. A new tax provision has created new opportunities for Roth IRA conversions in 2010. Here with me to discuss this is Morningstars Director of Personal Finance Christine Benz. Thanks for joining me Christine.Christine Benz: Hi Rachel nice to be here.Rachel: So whats the special opportunity in 2010?Christine: Well right now in 2009 you have to have income of less than $100,000 to be able to convert your traditional IRA assets to Roth beginning in 2010 though any one of any income level will be able to make the conversion and the other great thing about converting in 2010 is that youll be able to split the tax it associated with that conversion over 2011 and 2012 so that will help ease the pain a little bit.Rachel: Whats the big benefit of converting to a Roth IRA and who does it make sense for?Christine: A couple of key benefits. First is that you will be able to take tax free withdrawals and retirements so thats a huge advantage and the other big benefit is that you dont have to take distributions in retirement unlike with traditional IRA assets so the types of individuals for whom this one made sense would be first of all the person who has many years until retirement so they have time to recoup the tax hit associated with the conversion. Also people who are in higher income tax brackets and have not been able to contribute to Roth IRAs because they earn too much but maybe they have a lot sitting on the sidelines in traditional 401Ks or other retirement vehicles that will be taxed upon retirement. That will be a person for whom a conversion could make sense because they can get at least part of their retirement assets into that tax free withdrawal category. And finally, the Roth conversion can make sense for people who have a lot of retirement assets. Have a lot of assets period perhaps and dont expect to need to take distributions from their IRAs in retirement and that they can stretch out the tax benefits for their errors and leave those IRA assets to their errors and the Roth because it doesnt require distributions allows them to do that.Rachel: So converting to a Roth IRA and paying taxes now is basically a bet that taxes will be higher later so you want to get them out of the way now. What about the possibility though that someones income might be much lower in the future when theyre retiring?Christine: You are absolutely right. Youre betting on a lot of variables about which we really have no idea. I think you can look at issues like the Federal Deficit and so forth and maybe safely assume that taxes could be higher in the future but we dont know. But the reason I liked an IRA conversion as an idea for a lot of different types of investors is that it helps you buy some diversification of tax treatment for yourself so just as you want asset class diversification in your portfolio. I think it also makes sense to think about having some assets that will be taxed upon withdrawal in retirement and have some that youll be able to withdraw on a tax free basis.Rachel: Speaking of the possibility of higher taxes in the future there has been some conspiracy type discussion that what if the government takes away the tax benefits to the Roth IRA and you have to pay taxes on them again in the future. Do you have any thoughts on that?Christine: Well you know people are perhaps legitimately worried about that because we really dont know what the tax code will look like in the future. One thing I take some consolation is that the Roth here before has been pretty much a middle class savings vehicle now some hiring income savers will be able to get in on the act but if you think about the unpopularity of razing the tax on people who have been saving for retirement and theyre mainly middle class people so I think that there could be sort of a political head wind to changing the tax treatment of Roth Assets. And the other thing is that if you were to be taxed upon withdrawal you wouldnt be taxed again on the money that youve already paid taxes on. Youll just be taxed on your investment earnings so it wouldnt be the whole kiddy. Its still wouldnt be good but it wouldnt be maybe as bad as being taxed on that whole pool of assets.Rachel: Are there any people who you think will be better off staying in their traditional IRA or their traditional 401K rather than converting to the Roth?Christine: Its a great question Rachel and its also a good time to point out that it really pays to check in with the tax advisor or financial adviser before you decide to make a conversion but the key category of individuals who should think twice about converting would be people who dont have the money on hand to pay the taxes associated with the conversion and theyre under age 59-1/2. So for people like that were going to have to withdraw IRA assets to pay the taxes. Fill out taxes upon that withdrawal as well as an early distribution penalty so that would be a big red flag, a big reason to think twice about doing it. And the other key type of individual would be someone who is close to retirement hasnt amassed a lot in terms of retirement assets for that person theyre probably better of assuming that they will be in a lower tax bracket upon retirement and taking those taxed distributions in retirement rather than switching through off status.Rachel: Well thanks for those insights.Christine: Thanks Rachel.Rachel: For Morningstar.com Im Rachel Haig.