Matt Carbone, Regional VP Ameriprise, gave an excellent, thought-provoking presentation on this timely, complicated subject.
Three points that I found interesting were:
1. A Roth Conversion triggers a lot of side effects on, for example, AMT, Social Security taxes and Medicare premiums. A quick way to assess these impacts is to put the contemplated conversion amount on the 2009 tax returns and work through the implications.
2. In terms of one of the biggest benefits- the recharacterization feature - you generally can't "cherry pick" stocks etc. or parts of the portfolio that have dropped. One thing you can do is set up separate IRAs for your bonds, emerging market ETFs, Growth stocks etc. Then do the conversion, and if emerging markets drop, for example, 20%, you can recharacterize that part of the conversion.
3. If a child earns income, have them put a portion into a Roth IRA and partially match their contribution. With the contribution, have them buy a fund or an ETF. It is a great way to enhance their financial literacy.
4. An inherited IRA or Roth IRA is a windfall, and research shows that windfalls tend to be spent within 12 to 18 months of receipt. Ameriprise and some others have a feature where the inheritor receives the RMD up to a specified age and then receives the balance. This produces the value of the inheritance of getting long term, tax free, growth.
They recommended getting tax advice in determining whether a conversion is appropriate for you.
I am in no way connected with Ameriprise.
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