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To Roth, or Not to Roth?print | MONEYLINE - To Roth, or Not to Roth? By NEIL DOWNING Q: I have money in a traditional IRA that was rolled over from a 401(k) over a year ago. . . . Should I roll this traditional IRA over to a Roth IRA and pay the taxes now? One of the main reasons I'm considering this is that I've been unemployed this whole year, and as I understand it, the taxes I will pay when rolling over will be minimal (since my wages are minimal this year). . . . After the transfer I may need to withdraw some money over the next year or so. Would the tax hit be worse in the Roth IRA? M.P., Huntington Beach, Calif. A: When clients ask financial adviser Robert J. Sclama whether it would make sense to move money from a traditional IRA to a Roth IRA - - to "convert" to a Roth IRA -- he said he considers a number of factors. Here are two: * Your Tax Bracket: What's your federal income-tax bracket? This is important because, in general, you must pay federal income tax on the amount you convert. So, the greater the amount of your conversion, and the higher your income tax bracket, the more tax you'll have to pay, said Sclama, who teaches taxation at Bryant University's financial- planning program. For example, if you convert $1,000 to a Roth IRA, you'll pay $150 in federal tax if you're in the 15-percent bracket, $250 if you're in the 25-percent bracket. In general, it makes sense to convert only if you have money from other sources (not from your IRA) to pay the tax bill, he said. Converting also makes sense if you're in a low bracket, he said. * Your Age: How many years will you have to recover the amount you originally shelled out to pay the tax associated with conversion -- and still come out ahead? In general, the younger you are, the more time you'll have, Sclama said in an interview at his office in North Providence, where he runs his own financial-planning and tax-consulting practice. In other words, the more time you have before withdrawals, the more sense it makes to convert, said Sclama, former head of the Rhode Island Society of Certified Public Accountants' federal and state tax committee. (Other factors include how much your account is likely to earn over the years, and any state and local tax treatment.) "It's a personal decision, and depends on various factors," Sclama said. In your particular case, you're in a low tax bracket now, and it appears that, based on the facts you supplied in your question (some of which I had to delete for space considerations), you have some years to go until retirement. Thus, assuming you have the cash flow to pay the tax, you should consider converting at least some or all of your traditional IRA to a Roth IRA, Sclama said. (Remember: You needn't convert all of your traditional IRA; you have the option to convert only a portion.) There are various benefits to converting, too many to list here in any detail. One is that, if you meet the rules, your withdrawals will be tax free. (To qualify for tax-free treatment, you generally must hold the Roth account for at least five years and be 591/2 or older, although certain exceptions apply.) Another benefit is that, unlike with traditional IRAs, you need never make withdrawals. Instead, you may leave your Roth account intact until you die; it could then pass to your beneficiary, who would be able to make tax-free withdrawals. What if you withdraw money from a traditional or a Roth IRA too soon? You'll generally have to pay tax plus a 10-percent penalty, Sclama said. (You might escape the penalty if an exception applies. Also, special ordering rules apply to premature withdrawals of amounts converted to a Roth IRA.) Your best bet: Convert at least some money from your traditional IRA to a Roth IRA while you're young and in a low tax bracket, then give the account a long time to grow before you consider withdrawals, Sclama said. Rules for Roth IRA conversions - including those for premature withdrawals -- are too involved to list here. (For instance, you're eligible to convert only if your adjusted gross income is $100,000 or less for the year of conversion -- and special rules apply in determining what counts as income for this purpose.) For more information, see Internal Revenue Service Publication 590. For a free copy, visit your local IRS office, call the agency toll-free at (800) 829-3676, or use this Web site: www.irs.gov/formspubs Q: Just wondering: You give these telephone numbers to call these credit [reporting companies, to obtain a free copy of your credit report], but you only give one number, and I know there are three different credit [reporting companies], and we don't quite know how that works. -- J.D., East Greenwich A: Three big national credit reporting companies are taking part in the program, required by federal law, through which you may obtain a free copy of your credit report. The companies are Equifax, Experian and TransUnion. But the companies aren't individually handling the requests; they've created a clearinghouse to do the processing for them. It is through that clearinghouse that you may obtain a free credit report once every 12 months from each of the three national credit reporting companies. So call the clearinghouse toll-free at (877) 322-8228, or use this Web site: www.annualcreditreport.com You may also write the clearinghouse for a free copy, but you must use a standardized request form. The form is available to print out from the Web site listed above. Once you have the form and fill it out, mail it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. By the way: To ensure that you get the right Web site address (and don't accidentally type in another that's run by an outfit that'll charge you for credit reports), use a link on the Federal Trade Commission Web site, which will take you directly to the clearinghouse: www.ftc.gov TODAY'S TIP: The IRS is looking for volunteers to help people prepare tax returns through the Volunteer Income Tax Assistance (VITA) program. The IRS provides free training in tax law and electronic filing software, and also furnishes free educational materials needed to prepare basic individual income tax returns. The IRS wants people who can volunteer an average of two to four hours per week from February through April 15. For information, call Holly Longley, IRS Tax Specialist, at (401) 525-4151, or write: IRS, Stakeholder, Partnership, Education and Communication Office, 380 Westminster St., Providence, RI 02903. Neil Downing is a Journal staff writer and author of The New IRAs and How to Make Them Work for You. Questions about your money matters? Call us at 1-401-277-7484 and leave a message, or e-mail: moneyline@projo.com Homepage Other open community sites http://www.business-business.biz Please support are sponsors. 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