Preaching to the Unconverted

The double-whammy of a shrinking portfolio and the loss of a job has caused much agitation among many investors -- but that unfortunate scenario could also herald a big opportunity, tax-wise.

Converting an existing IRA into a Roth IRA makes sense for most wealthy investors -- yet most wealthy investors are prohibited from this tax-saving strategy, since the tax law doesn't allow investors (whether filing singly or jointly) with more than $100,000 in modified adjusted gross income (MAGI) to convert. (For purposes of Roth conversions, AGI is "modified" by including certain income such as Social Security benefits, and excluding certain deductions such as those for student loan interest.)

"A lot of wealthy individuals have seen their income dip below $100,000 for the first time," says Kaycee Krysty, a financial planner with Tyee Asset Strategies in Seattle. "This is a big opportunity for them."

The big advantage of Roth IRAs lies in the fact that -- because the money goes into the Roth after it's been taxed -- qualified withdrawals are entirely tax-free. ("Qualified" withdrawals refer to any gain that your initial investments earn: Your after-tax contributions can be withdrawn at any time for any reason without additional tax or penalty.) For a withdrawal to be "qualified," the Roth must have been open for at least five years and you must be 59 1/2 or older, disabled or a beneficiary. You also can also take out up to $10,000 of gain tax-free if you're using the money to buy a home. That $10,000 is a lifetime limit, not an annual one, and the home can be for you, your children or grandchildren, provided that you haven't bought a new home in the last two years.

An additional bonus of Roth IRA concerns mandatory distributions -- there aren't any. Traditional IRAs require that their owners start withdrawing a proscribed amount annually once they turn 70 1/2. Roth IRAs, though, have no such restrictions, making them particularly attractive as an estate planning tool.