So a friend of mine observed that this year, you can convert a regular IRA into a Roth IRA

[closeupready]

without penalty, though you do have to pay income taxes on it, and also, it must stay in the Roth IRA for five years. This is different from simply cashing out an IRA, in that, if you cash out an IRA, the federal government imposes financial penalties.

My question was, 'why would I do that?' He said, because when you later pull it out, you don't have to pay taxes on it. Not clear to me if the 'not having to pay taxes on it' part means, I wouldn't have to pay capital gains taxes on my gains, is that correct?

Is there someone here familiar with this tax law who can shed some light on 1) whether this is true; and 2) what the benefits of doing this are?

I'm suspicious, to be honest. Sounds more like a broker's hard sell than good sense.

[Hello_Kitty]

1. Actually, I hope a lot of people do it because it will produce a spike in tax revenue.

[closeupready]

2. no question about that.

n/t

[Arctic Dave]

3. Most IRAs are like 401k, they are pre-tax deductions and are taxed at withdrawal

A Roth IRA is an after tax account and can't be double dipped by the IRS when money is withdrawn from it.

[closeupready]

7. I'm just suspicious about their promises, since

they now tax ss benefits, whereas they didn't always do that.

[Arctic Dave]

8. They have been this way from the beginning.

When I want to put money for a down payment on a large purchase I sometimes use my Roth funds.

[FBaggins]

4. You've always been able to convert a Traditional IRA to a Roth

It's just that there was a cap on how much income you could have and still do this ($100,000). That cap is removed for 2010 (in an attempt to boost current-year tax revenue at the expense of future taxes).

As for your second question. There would be a benefit (assuming Congress doesn't change either plan later) IF you anticipate your income tax rate in retirement to be higher than your current tax bracket. If you're in your peak earning years and expect a tax rate decline in retirement, it makes little sense.

Last summer would have been a good time to do this, since many people experienced significant declines in their IRA balances (thus paid taxes on a smaller sum).

[closeupready]

6. thanks.

:hi:

[DailyGrind51]

5. You either pay now or later. I only make a deposit to my traditional IRA when I need the deduction.

[wishlist]

9. Other advantage is Roths have no mandatory withdrawals at age 70 1/2

I have converted mine to Roths since I expect to be in a higher tax bracket in future years and I did not want to have to make mandatory yearly taxable withdrawals later which are required with Traditional IRA's. Taxes on converted IRA's this year can be paid either this year or spread between 2011 and 2012. However if someone is going to need the mandatory withdrawals in retirement anyway and be in a lower tax bracket later and possibly have nursing home costs as deductions against taxable income, it would probably be better to not convert.

[Bolo Boffin]

10. Pay the taxes now, you don't pay the taxes on withdrawals in the future.

That is correct.