My Traditional IRA Conversion To A Roth IRA

A few weeks ago I finally rolled over my old 401k into an IRA at Zecco. It would have been easier if I could have directly rolled it over to a Roth, but they and all the other online brokers that I looked into required that the 401k be rolled over to a traditional IRA, then converted to a Roth. It was an extra step, but really not much of a hassle.

As you probably have heard converting an IRA to Roth is a really good idea this year. The government is offering some very rare and kind exceptions.

U.S. Tax Rates

After watching a video that talked about the historical tax rates in the U.S., I decided I needed to get all my retirement money into a Roth. Did you know that tax rates have been over 90%? I had no idea that taxes had ever been than high.

Granted it was for the richest Americans, but still if you compare that to the 35% top tax rate that we currently have you can see how we might be getting off pretty easy. And with government spending off the charts, you can bet that we will see taxes rise in the future.

So what does this have to do with converting to a Roth IRA?

The reason you would convert a Traditional IRA to a Roth is so that you can pay taxes now (at our relatively low tax rates) and not have to pay them later when you make withdrawals. If our tax rates were really high right now and I had a strong hunch that they would be much lower for me – or that I’d be in a lower tax bracket – it might make sense to stick with the traditional IRA. But since I am betting that our U.S. tax rates are going to have to go up, I would rather pay my taxes now at the lower rate.

Gotta pay the piper

The downside to this is that I have to pay extra taxes when I file my taxes next year. I owed money on my taxes for the first time this year and am not really looking to paying the IRS again – but I am convinced that it is worth it. So, that is what I will be saving for. 😉

Back to the IRA conversion

So, I am not sure how IRA conversions work everywhere else, but at Zecco once you have a Traditional IRA established with them it was really as simple as…

  1. Create a Roth IRA account
  2. Fill out this IRA Conversion Request form.
  3. Fax or Mail the completed form back to them
  4. Wait a few business days

For me after I faxed the form over, I checked back in a week and the conversion was complete. It was really as simple as that.

Have you converted an IRA to a Roth? Are you going to this year?

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  1. Debt Vigialante

    Hey Bob…Just wondering – did you catch the year(s) that the tax rate was 90%?

  2. JoeTaxpayer

    Bob – I hope you know what marginal rate you’ll be at this year, and that the conversion doesn’t put you in to the next. Also – keep an eye on the value of the converted funds. If the market takes a dive, you may be better off recharacterizing, and converting again next year with lower taxes due.

    • Bob

      I am keeping an eye on it – and I will keep the recharacterization in mind as well. Being a 20-something, I still have a pretty small retirement account so I guess that makes it a little less painful 😉

  3. Erik

    I’d like to do a conversion but my marginal rate is near the border of two tax brackets this year and I think it might be the higher one. I have been trying to take a guess at what the brackets will be next year. I went to this moneychimp site which has the data from the 2000 tax brackets before the expiring Bush tax cuts and I think its safe to assume it will look more like those brackets look like.

  4. Toby

    Don’t forget though, if you are luck enough to already be making a lot of money, you might be in spot where you are ineligible for a ROTH altogether, but possible still be eligible to make a deductible traditional contribution… I don’t have the figures handy…

  5. Jeremy Schmitt

    If I roll my traditional IRA to a Roth IRA in January of 2011 can I count this transaction on my 2010 taxes, or did this have to take place before 12/31/10 in order to do this type of a thing? Of note, I started the 401k converstion to a traditional IRA in December of 2010 but the transaction was consumated in January of 2011 (before my 2010 tax return was filed.

  6. JoeTaxpayer

    No Jeremy, a conversion had to be complete by year end to claim in ’10.