Roth Mania!

If your banker, broker, or tax adviser hasn't yet pitched you on moving money from your individual retirement account to a Roth IRA, expect a call. As of January 1, anyone, regardless of income, can transfer funds from a traditional IRA, whose withdrawals are taxed, to a Roth, whose withdrawals aren't. A lot of financial pros are eager (maybe too eager) for you to switch, and the government has chipped in with a one-time incentive.

It works like this: if you withdraw money from your IRA to transfer it to a Roth in 2010, you can choose to pay the income taxes on that withdrawal over two years, with the tax returns you'll file for 2011 and 2012. Postponing payment blunts the immediate cost of conversion but carries its own risk—that your income tax rates for those years will turn out to be higher.

While deciding on the wisdom of a Roth retirement account can get complicated, its main selling point is simple: if you follow the rules, your withdrawals will be tax free. With a traditional IRA, by contrast, you pay no income tax on amounts you contribute, but your withdrawals in retirement will be taxable. In effect, the government is your silent partner in a traditional account, its stake in your money growing along with yours. By converting a traditional IRA to a Roth, you buy out that partner and become the sole owner of your nest egg: all its future growth will belong to you.

Some financial gurus believe that Roth conversions are a particularly good opportunity now. Their reasoning is that although taxes may feel high, today's tax rates are historically low, and the government will probably be forced to raise revenue to meet payments on the national debt. "These are the lowest rates most people will see for the rest of their lives," asserts Ed Slott, a Rockville Centre, New York, IRA expert best known for dispensing financial advice on PBS shows such as Stay Rich Forever and Ever.

Three Questions to Ask

Whatever you may hear about the appeal of turning a traditional IRA into a Roth, there's no one-size-fits-all answer. Basically you're determining if you should pay taxes on your nest egg now or later. What's best for you depends on your own tax rate, not rates in general. Your time frame matters, too: a conversion makes sense only if the Roth IRA can grow long enough to make up for the income tax you must pay to create it. That can easily take ten years or more, depending on how your investments fare. But conversion need not be an all-or-nothing proposition. In your 50s, for example, you might put just a piece of your nest egg in a Roth that you earmark for spending tax-free in your 70s or 80s.