A Strategy for Retirement Portfolios That Have Sagged

By Lindsay Chin

IF your retirement assets took a beating in the recent stock market decline, converting a traditional I.R.A. to a Roth I.R.A. may be one of the best tax strategies this year.

When you do the conversion, you must pay income tax on the amount you are converting. This can be the whole account or a portion of it. But, subject to certain restrictions, no tax is assessed when the money is withdrawn. You also avoid the requirement to take yearly minimum distributions beginning at age 70 1/2, which can leave more for your heirs if you don’t use the money yourself.

How much you benefit from the conversion will depend on how the investments do subsequently, but there is great potential. Consider Albert Horrigan, 66, a semi-retired real estate broker in Sarasota, Fla., who converted a $50,000 I.R.A. to a Roth I.R.A. in 1998.

Through a series of investments since then, including Apple stock and what he called a shack on 40 acres in Lamoille, Nev., the account grew to be worth more than $1 million. Had Mr. Horrigan held the same assets in a traditional I.R.A. account, all that growth would have been subject to income tax when he withdrew the money.

Now Mr. Horrigan is thinking of converting another traditional I.R.A. that declined in value by 20 percent this year. If the investment springs back, that appreciation will be free from income tax. And if tax rates increase later, he will have done the conversion at today’s lower rates.

Link to Article