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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


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 ("Qualified" withdrawals refer to any gain that your initial investments earn: Your after-tax contributions can be withdrawn at any time for any reason without additional tax or penalty.)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


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.

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Back to the Good News

Because the money that goes into a Roth must be taxed, if you'd like to convert all or part of an existing IRA into a Roth, you'll have to pay ordinary income tax (


capital gains tax) on the entire amount. Now here's where the silver lining of the market's storm clouds come in.

If you or your spouse spent much of 2002 out of work, you might easily be in a much lower tax bracket than ever before. That means if you roll over your existing IRA into a Roth, the tax you'll pay will be at that low rate. "You could feasibly convert an IRA and pay almost zero tax, or at least stay in the bottom bracket," says Paul Yurachek, a financial planner with American Express Financial Services in Bethesda, Md. "But if converting your IRA will actually push you into a higher bracket, then it may not be worth it."

And here's more from the bright side: Your decimated portfolio won't incur as much tax. When Roth IRAs were first introduced in 1997, many investors didn't want to convert their huge portfolios and incur such high additional tax. Now, though, those smaller portfolios are much cheaper to roll over, particularly if you're in a lower tax bracket.

Your IRA portfolio will be valued on the date that you convert it to a Roth (which you can do through the brokerage or mutual fund company that holds your IRA, or you can open a new account elsewhere.) All conversions must be made by Dec. 31, although you have until April 15 of the following year to "recharacterize," or undo the Roth conversion.

Think Twice

Converting to a Roth IRA won't make sense for everybody. Since the bonus is on the back end, it makes more sense to convert if you expect to be in a higher bracket when you withdraw the money, or if you don't plan to withdraw the money at all and simply leave it to your heirs.

"The younger you are, the more advantageous a Roth conversion is," says Stephen Cohen of Sage Financial in Bala Cynwyd, Pa. "Just pay the tax upfront when your taxes are lower and your asset base is smaller, and then let the compounding work for you."

Calculating the various scenarios can be a bit tricky, so consult a tax planner to help you work through them. Generally, though, if you've spent 2002 out of work and watching your assets shrink, converting to a Roth can save you big in the future at little to no cost today.

"If your bracket today is low and will be higher in the future, than why not convert?" Yurachek says. "This is absolutely a good year to do it."