Roth Conversion: When is it the Right Strategy?
Individual taxpayers have a unique opportunity to pay their federal income tax early with a Roth conversion. Although it breaks the most practical rule of tax planning – defer taxes as long as possible – a Roth conversion may create significant tax savings based on a taxpayer’s timeline for spending retirement savings and expectation of future tax rates. Tax liability on a 2010 Roth conversion is divided equally between 2011 and 2012. Furthermore, a taxpayer who makes a Roth conversion in 2010 can reverse the tax transaction at any time before the filing deadline for the 2010 federal income tax return without incurring penalties. This Client Alert provides a framework for evaluating the cost of the accelerated income tax liability generated by a Roth conversion against the benefits of longer tax-free growth.