As a professional advisor, I hate giving “It depends” advice as much as clients hate hearing it.  That’s why I particularly appreciated a meeting I had last week with Marc Angle, from Bernstein Global Wealth Management, on Roth IRA conversions.  Marc actually had some rules of thumb about when converting a traditional IRA to a Roth IRA makes sense.

Some background:  Beginning this year, individuals can convert traditional IRAs to Roth IRAs without regard to their income (previously, there was an income ceiling that made conversion unavailable to some).  Contributions to tradional IRAs are tax exempt, but withdrawals (which must begin at age 70 1/2) are taxed at ordinary income tax rates.  Contributions (including conversion) to Roth IRAs are taxed immediately at ordinary income tax rates, but withdrawals (not mandatory) are not taxed.  Basically, the question is whether to pay the tax now (Roth IRA) or pay the tax later (tradional IRA). 

Here are some rule of thumbs from Marc Angle:

1. If you can pay the tax on a Roth IRA conversion from funds outside of the IRA, then the conversion probably makes sense.  This is especially true if you can pay the conversion tax in 2010, because individual income tax rates are scheduled to increase in 2011.
2. If you anticipate withdrawing from the IRA during your lifetime, conversion only makes sense if your effective tax rate is not expected to fall significantly (for instance, by 10% or more).
3. If you anticipate waiting a longer time to begin withdrawing from the IRA (for instance, age 75 or 80), then the conversion probably makes sense.
4. If you anticipate leaving the IRA to the next generation, then the conversion probably makes sense.

Even with these rules of thumb, talking to a financial advisor is a must when it comes to your decisions about whether to convert a traditional IRA to a Roth IRA.