Sunday, January 10, 2010

More on traditional to Roth IRA conversions

So, Happy New Year to everyone! It's 2010 now, which means we can start converting our traditional IRA's to Roth!
Now, one more thing I found on these conversions- you may be able to "re-characterize" your newly converted Roth IRA back to traditional within the year after the original conversion.
Why to do that?
Suppose you had $10,000 in your traditional IRA, which you funded tax-free. Upon conversion, you'll owe your going rate (28-32% or whatever your tax bracket is) on this converted amount.
Suppose now, that within a year your original 10k dropped in value to 8k. Then you can do "re-characterization" of your Roth back into traditional IRA to avoid paying taxes on already depreciated asset.
Some authors even advise to create several Roth IRA's and transfer each kind of assets
( US large, US small, emerging markets, bonds, etc) into a separate Roth IRA. That way, you can see what depreciates ( hopefully none, but you never know), and "re-characterize" it, leaving appreciated assets in their respective Roths.