Summertime for ROTH

To the tune of George Gershwin, lyrics of Dubose Heyward:

Summertime
And the livin' is easy
Fish are jumpin',
And the cotton is high.
Oh, your daddy's rich,
And your ma is good lookin',
So hush, little baby,
Don' yo' cry.

When I sing these lyrics, and I am a big fan of the classic American song book, I think of ROTH IRA conversions. Really, I do!

2010 is the time to think about converting the regular IRA to a ROTH IRA. You do pay tax, but you get to spread the tax out over the next two years, and there is no longer any AGI restriction. The Wall Street Journal had a recent article where they mentioned that some notable people will be doing the conversion, including Michael Graetz, the brilliant tax professor.

Should you convert? It depends. And therein lies the genius of the lyrics of Porgy and Bess. To determine whether the conversion makes sense, you must run the figures for your client. And during the summer doldrums is a wonderful time to crunch numbers.

And the conversions seem to make sense if your daddy's rich, especially given that future tax brackets might be higher than they are presently. If your clients are in the roughly 50% of the population that do not pay income tax, conversion is not advised. And, as for the little baby, remember that ROTH distributions are tax free and there is no RMD, so conversions are great for that little baby.

But do the calculations carefully. Or else you'll be singing Ira Gershwin's words, “Oh, I got plenty 'o nuthin'.”