Conversion

Conversion is a feature allowed by the IRS when Traditional IRA owners want to move their money from a Traditional IRA to a Roth IRA. Generally, this is allowed for a partial or whole amount of the Traditional IRA. Currently, it’s limited to folks under $100,000 adjusted gross income, but in 2010 anyone can do a conversion regardless of income level.

When converting, you will be responsible for related income taxes on the amount in that same tax year. One way to avoid this however is if the amount moved is lower than what you put in with after-tax dollars. This is a common situation right now for folks who owned stocks and/or mutual funds. If you’re below your deposited base due to market loss on paper, now is a great time to convert and reinvest via a Roth IRA in those same stocks and/or funds. Yes, you may have some market trade fees, but your taxes will be nil. Then your money can grow in a Roth when the market comes back up and increase tax free for the future.