Conditions are great this year to convert your traditional IRA into a Roth IRA. A conversion is treated as a taxable distribution from your traditional IRA and therefore means a larger tax bill if done before the end of the year, but there are positives that should outweigh the negative hit.
Federal income tax rates are super low right now and the Bush tax cuts are set to expire at the end of the year. Paying the low rates now makes sense knowing that taxes will rise in the near future. Plus, all withdrawals from your Roth (principle and earnings) are tax-free once you reach age 59 1/2 assuming certain conditions are met. Furthermore, the new 3.8% Medicare surtax on investment income starts in 2013. While you may not be assessed that tax, you definitely won’t be if you convert before the end of the year.
One last thing to consider, is that you have until October 15, 2013 to re-characterize a 2012 conversion. If the value of that converted account tanks, you can switch back to a traditional IRA. For more details, head over to MarketWatch.com.
You have until the end of the year to take advantage of the possibly huge savings by converting. Be sure to talk to one of the tax experts at The IRA Financial Group to see exactly how this will work for you.