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Switching to a Roth IRA

Marketplace Staff May 16, 2008

Switching to a Roth IRA

Marketplace Staff May 16, 2008


Scott Jagow: Yes, the economy’s down. Yeah, the stock market’s uneasy. But that doesn’t mean you have to sit on your investments and wait things out. In fact, down time can be a good time to make some moves as Jeremy just pointed out in his story.

For example, shifting your money from a traditional IRA to a Roth IRA. Let’s bring in Christine Fahlund. She’s a certified financial planner for T. Rowe Price.

Christine, why is that a smart move?

Christine Fahlund: Well, right now the market is down, generally speaking, and you’re probably looking at a Traditional IRA balance that’s lower than when you saw, say, six months ago. So this could be a good time to consider converting some of your assets to a Roth IRA.

Jagow: What is the benefit of doing that?

Fahlund: When you convert from a Traditional IRA to a Roth IRA, you have to pay taxes on the money that you’re converting. If you have less money to pay taxes on, you’re going to pay less in taxes and that’s going to be an opportunity for you that you won’t have when the market goes back up.

Jagow: Of course that assumes that you have time for the market to go back up. I’m assuming this isn’t for everybody?

Fahlund: Well, it is not necessarily for everybody, but there are a lot of pre-retirees, they say “Let me pay my taxes now. Once I’m retired, I’d like to avoid as many tax payments as I can, because that’s not going to be much fun.”

Jagow: So you’re basically getting the taxes out of the way with the Roth IRA?

Fahlund: Exactly. Now, it’s very important, Scott, that you pay the taxes from your taxable account, which might be invested in mutual funds, it might be in money market accounts. You don’t want to dip into the IRA itself in order to come up with the tax money. If you do that, there won’t be any advantage to you.

Jagow: Is everyone eligable to do this or are there restrictions on who can rollover from Traditional to Roth?

Fahlund: Well, today there are restrictions. In the year 2008 and 2009, there are restrictions that only people who have adjusted gross incomes of $100,000 or less are eligable to convert from a Traditional IRA or a rollover IRA to a Roth IRA.

Jagow: What’s the argument for not doing this?

Fahlund: Well, the argument for not doing this is that a lot of people simply don’t want to pay the government any taxes before they’re due and for some folks, no matter how good the deal might be, they’re simply not interested.

Jagow: Now is this conversion an all-or-nothing proposition or can you rollover a portion of your Traditional IRA into a Roth?

Fahlund: No Scott, you can convert as much or as little as you would like in any given year. As long as you’re eligable, you certainly don’t have to convert it all in one year.

Jagow: What other things do you advise people to do in a down market?

Fahlund: Well, you know you have to look at a down market as the silver lining and in a down market, everything’s on sale if you think about it in those terms and we all like sales. What you’re doing is you’re able to purchase shares of investments at a lower price than you would be if the market were very high right now. So you need to take advantage of that if you are investing for the long term, it’s counterintuitive. You say, “Oh, I think I’ll wait until the market’s back up again,” but that’s exactly what you don’t want to do. You want to be buying now while the market is lower.

Jagow: Christine Fahlund, she’s a certified financial planner for T. Rowe Price. Thanks for joining us.

Fahlund: Thank you.

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