The time is certainly right for many investors to consider converting their traditional IRAs into Roth IRAs. But that consideration requires a careful assessment of your particular circumstances -- and not everyone will benefit.

On Monday, we talked about a few scenarios in which most people would benefit from converting (see

Preaching to the Unconverted.) Now let's look at a few cases in which the Roth conversion may

not

be a good idea.

With traditional IRAs, investors get a tax break on their contributions but owe income tax on everything they withdraw. With Roth IRAs, though, the taxation is essentially reversed -- your contributions are taxed (in other words, there's not deduction), but qualified withdrawals are not. ("Qualified" withdrawals refer to any gain that your initial investments earn: Your after-tax contributions can be withdrawn at any time for any reason without additional tax or penalty.)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 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 prescribed amount annually once they turn 70 1/2. Roth IRAs, though, have no such restrictions, making them particularly attractive as an estate planning tool.

Keep in mind, though, that the money that you move from a traditional IRA into a Roth IRA counts as income -- even though you're just switching it between accounts -- and you will owe ordinary income tax on that amount. If the amount is relatively small, or if your income tax bracket is lower this year than you expect it will be in the future, it will likely pay to convert. (Only taxpayers with modified adjusted gross income of less than $100,000 are eligible to convert their traditional IRAs to a Roth.)

When making your decision, though, consider what that boost in income will mean. If it will push you past the threshold for qualifying for certain tax breaks, you'll have to weigh the immediate benefit of the tax break against the long-term benefit of tax-free withdrawals from the Roth.

The long-term benefits of converting to a Roth, for instance, might warrant forgoing a $500 Child Tax Credit this year.

Age Before Beauty

Elderly investors have a few added considerations when converting. "Converting to a Roth is most desirable for long-term investors," says Bob Scharin, editor of Warren, Gorham & Lamont/RIA's

Practical Tax Strategies

, a monthly journal written for tax professionals. "That means either younger investors or older people who don't want to (and won't need to) withdraw any funds from their IRA."

Like younger taxpayers, elderly taxpayers risk losing their eligibility for certain tax breaks if the amount they're converting pushes them past the threshold, and will also owe income tax on the amount they convert. In addition, though, they could also see more of their Social Security benefits taxed as a result of their Roth conversion.

Social Security benefits are 50% taxable when modified adjusted gross income plus one-half of the Social Security benefits received exceed $25,000 for single filers or $32,000 for joint filers. Up to 85% of Social Security benefits are taxable when the income level exceeds $34,000 for single or $44,000 for joint filers. Since the money involved in a Roth conversion is considered taxable ordinary income, it could mean you'll end up having a higher percentage of your Social Security benefits taxed.

Also, investors 59 and older should only convert if they're certain (or at least highly confident) they won't need the money in their lifetime. The Roth must be open for at least five years before investors can withdraw any gains tax-free; but even if you'll need the money in 10 years, you're probably better off allowing the money to continue to grow tax-deferred until you start making smaller withdrawals and paying income tax on each distribution.

Investors that have already begun their mandatory distributions but still want to convert can do so, but if you haven't yet withdrawn your money for 2002, leave at least that amount in your traditional IRA and convert the rest, Scharin advises. You'll still need to take your mandatory distribution for 2002, even if you also convert in 2002.

And one more caveat no matter what your age -- under no circumstances should you convert a traditional IRA into a Roth if you don't have outside funds available to pay the tax. Dipping into your Roth IRA to pay the tax on your conversion to a Roth IRA just doesn't make sense.