Q&A: How to Prepare for a Slow Roth IRA Conversion @ WSJ.com

Ask Encore @ WSJ.com
Focus on Retirement - By KELLY GREENE

Q: I'm 60 years old and plan on converting portions of my IRA to a Roth yearly, over the next 10 years. My question is: Should I convert the winners or losers first?

—Karen Quandt, Maryville, TN

A: When considering converting investments to a Roth IRA from a traditional individual retirement account, past performance is less important than what you anticipate in the future.

"I would say to convert the losers, if you expect them to become winners, and focus first on the ones you think are going to appreciate the fastest," says Ed Slott, an IRA consultant in Rockville Centre, N.Y.


First, the basics: Starting January 1, 2010, the $100,000 income limit disappears for converting traditional IRAs and employer-sponsored retirement plans to Roth IRAs. Although the conversion is subject to income tax, future withdrawals (that meet holding requirements) would be tax free.

With that in mind, let's go back to your winners-and-losers strategy: If you hold an investment with appreciation potential, or that you consider beaten down or depressed in value, it makes sense to convert it to a Roth, Mr. Slott says. That way, you won't have to pay tax on any increase in value.

Conversely, if you are holding an investment at or near an all-time high, such as a stock you bought for $20 that has climbed to $100, "that may not be the one to convert," he says.

You also might consider opening a separate Roth for each type of investment you make with the converted investments. That way, you could cherry-pick the so-called losers by "recharacterizing" any Roth IRA investments that lose value, Mr. Slott says. Even if your predictions turn out wrong, and the converted Roth assets fall in value, you are allowed to recharacterize the account as a traditional IRA and no longer owe the tax.

For example, let's say you made two types of investments, one that doubled in value and another that lost everything. If those investments were in the same Roth, the account value would appear unchanged. But if they were in separate accounts, you could recharacterize the one that suffered—and allow the one doing well to continue appreciating in value as a Roth.

(The deadline for recharacterizing IRA assets converted to a Roth in 2010 is October 15, 2011.)

One other note: As our reader recognizes, a Roth conversion isn't an all-or-nothing option.

One way to mitigate the tax-bill pain is to do incremental conversions across a number of years.

You might even want to get your accountant to help you figure out how much you could convert within your current tax bracket each year without bumping yourself into a higher one.

Write to Ask Encore at encore@wsj.com