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Converting your IRA
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November 1, 2000: 1:13 p.m. ET
A traditional IRA to a Roth IRA, or vice versa? What suits you best?
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NEW YORK (CNNfn) - If you earn less than $100,000 a year, you can convert your old IRAs into Roth IRA's any time you wish. Under the same income limits, however, you could also convert a rollover IRA into a Roth.
Deciding which type of conversion works best for you depends on a number of tax bracket considerations.
In response to a reader's question, Frank Armstrong, a certified financial planner and president of Managed Account Services in Miami, notes IRA conversions can be effective estate planning tool as well.
Ask the experts a question
My wife and I recently retired very early (both under 55) from professional jobs and we are currently not working, not even part-time. We have a couple of traditional IRA's that we opened in the early 80's, but we only contributed to these IRA's for as long as we could get a full deduction, which wasn't that long. Without additional contributions, they've been slowly growing for over 15 years. Our retirement investment income is within Roth IRA limits, but NONE of it is "earned income" as defined in the IRS documents regarding Roth IRA's. So can our traditional IRA's be converted to Roth IRA's (yes, I know about paying the tax) even though we have no "earned income" from employment? It looks like we can't open new Roth IRA's without earned income, but I wondered about conversions from existing traditional IRA's.
This might be an interesting way to "grandfather" our way into Roth IRA's for possible future use in rollovers out of our 401k's and pension plans (via a rollover IRA). I guess that's a secondary question along the same lines. I can't figure this one out from the IRS literature or web sites. Everyone more-or-less assumes some of your income is from employment.
If you fall within the $100,000 Modified Adjusted Gross Income limit you can convert your old IRAs into Roth IRA's any time you wish. Of course, under the same income limits, you could also convert a rollover IRA into a Roth, so you don't need to be "grandfathered".
I would have to know a lot more about your situation and motives before I could say whether conversion is in your best interests. Generally speaking, unless you have strong estate planning motives, or just can't stand the thought of forced distributions beginning at age 70 1/2, your decision should be based on relative tax bracket considerations:
1. If you expect that your tax bracket will be higher later in life than when you do the conversion, then conversion will leave you better off. But, not many of us have higher brackets as we age.
2. If you are in a lower bracket than the tax bracket that you have when you convert, you have shot yourself in the foot. Your after tax return will actually fall.
3. If you will stay in the same bracket during and after conversion, then you will not gain or lose a cent. After tax net will be exactly the same.
Of course, if you would like to do something very nice for your kids and grandchildren, AND you don't think that you will spend all of your retirement accounts during your life, then conversion may let you pay the taxes for your kids on a chunk of money that can grow tax free for most of the rest of their lives. The taxes you pay now can reduce the size of your estate for estate tax purposes, perhaps providing an additional benefit. It's not necessary to convert all your IRA's. You may find that a partial conversion works best to meet all of your financial goals. A planning professional can help you do that analysis.
Finally, whenever you consider conversion, keep in mind that the government could change the tax code on us down the road. It wouldn't be the first time! A flat tax, or a change in the estate tax or, one of the many other tax schemes constantly being discussed could wipe out many of the contemplated benefits. 
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