Rolling, Rolling, Rolling

Should you roll over a traditional individual retirement account into a Roth IRA, paying taxes on the money?


* Withdrawals of both principal and gains or interest will be tax-free, provided certain conditions are met.

* Experts say that if your tax rate will remain the same or increase in retirement, if your portfolio grows in value at historical rates, and if you have at least seven years or so before you will start making withdrawals, conversion will result in more money to spend during retirement.


* If you have decades before retirement, the mathematical argument in favor of conversion is even stronger.

* For 1998 conversions only, you have the option of spreading the payments for any tax bill over the next four years.

* If you would spend the money used to pay conversion taxes frivolously if you didn’t convert (rather than save it outside of retirement accounts), the conversion argument looks stronger still.

* If you decide to withdraw money before retirement, a Roth allows you to take out your original contributions without paying a tax or penalty. Even earnings can be withdrawn tax-free for certain purposes, such as a house down payment.

* After age 59 1/2, you can withdraw money at any rate or in occasional lump sums without paying a tax. If you don’t need the money, you can let it go to your heirs, free of income tax and without probate delays. However, the funds will count as part of the estate for estate tax purposes. (Traditional IRAs require minimum distributions each year after age 71 1/2.)


* You may not qualify. You cannot convert if you or you and your spouse filing jointly make more than $100,000 a year, excluding the rollover amount itself.

* You may have more important uses for the money you’ll need to pay the taxes on the conversion. (For the conversion to be worthwhile, this money should come non-IRA, non-retirement sources.)


* Your tax rate might be much lower at retirement, erasing or reducing the benefits of conversion.

* Your account might not increase significantly in value before funds are withdrawn, erasing or reducing the benefits of conversion.

* Congress could change the rules. If the change is radical--say, the income tax is replaced by a sales tax--you would lose money with a conversion.

* A rollover, particularly a big one, might make you ineligible for certain tax breaks and push you into a higher tax bracket for the next four years.


* The inheritance advantages of a Roth IRA might not be important to you.

* You might need the discipline of the taxes and penalties of a traditional IRA to avoid the temptation to use the money too quickly in retirement, or for eligible non-retirement purposes (a home, for example).