While Roth conversions won’t make sense for most people, there are cases when a partial conversion can save you taxes.  As the year comes to a close some people will find their taxable income unusually low for 2009 due to a job loss or self-employment income impacted by the economy.  If the situation is likely to be temporary and you have plenty of funds available in regular taxable accounts then converting a portion of your Traditional funds to a Roth might work well.  

Let’s take a case of a professional that was unemployed for most of 2009 yet now has a new job lined up for next year and will see their income return to the six figure level.  At $120,000 of taxable income (after exemptions and deductions) a single taxpayer would be in a 28% federal tax bracket while a couple would be in a 25% bracket.  If the 2009 taxable income is very low (or even negative) then converting a portion of a Traditional IRA to a Roth would generate taxable income that could be taxed at the low 0%, 10% or 15% rates.   The conversion amount would likely need to be $50,000 or less to keep the taxable income from climbing back to the higher rates.  

In this case the professional would want to ensure that they still have enough available in their regular taxable accounts to cover the extra taxes due.  The conversion would need to be done by December 31, 2009 to be taxed in the 2009 tax year.  In this case the new changes available in 2010 won’t apply.  

This strategy requires mocking up your tax return for the year before it’s over in order to determine the tax rates and a suitable amount to convert.  Check with a tax professional or our office for assistance.  At Vintage we don’t charge additional fees for this kind of financial planning for our clients.