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By Christine Benz | 02-17-2010 03:54 PM

Bullish on the Roth

T. Rowe Price senior financial planner Christine Fahlund says Roths are great for tax diversification and fantastic legacy opportunities.

Christine Benz: Hi, I'm Christine Benz from Morningstar. The Roth IRA has emerged as an interesting opportunity for a lot of investors in 2010, partly because they can now convert to a Roth regardless of income level.

Here today to discuss this topic is Christine Fahlund. Chris is senior financial planner for T. Rowe Price. Chris, let's start with a general question. I know that you at T. Rowe have generally been pretty bullish on Roths and Roth conversions. Can you talk about why that is?

Christine Fahlund: Yes. We think it is a terrific opportunity for individuals to diversify tax-wise. We always talk about asset allocation and diversification of your portfolio. Well, now we are talking about diversification of your account types. So you need to have some in taxable, some in tax deferred, and now, with the Roth, you can have some in a tax free account.

Benz: So the idea is that you obtain that tax diversification and can get at least some of your assets into that tax-free withdrawal column.

Fahlund: That's right. And then that gives you lots of flexibility and control. You may have a year in retirement where you have unusually high taxes and you need to withdrawal money just the same, but you really don't want to incur any more taxes. That might be the year that you withdrawal the money from your Roth instead of one of your other accounts.

Benz: And I know that you also think that there are particular estate planning benefits for people who have taxable estates and are concerned about limiting the tax collector's cut of their estate.

Fahlund: Yes. Roths are the goose that laid the golden eggs. They are fantastic legacy opportunities. You can leave a Roth. If you still have money in it at the end of retirement, it can go to children and grandchildren. They can have it as an inherited Roth IRA account. And they have to take minimum distributions each year, but that is all. And you can stretch those out until the beneficiary is age 80 or older.

Benz: So are there any situations where you would say, "Well, there is a big red flag not to do a conversion"? Can you talk about those?

Fahlund: Yes. Well, one of those situations is if you happen to be a professional who needs creditor protections. In other words, you are always exposed to litigation: you are a physician, you are an attorney. In those cases, you may want to leave money in the 401(k) plans, your old 401(k) plans from prior employers, rather than convert them to a Roth IRA, because generally speaking, there is better protection against creditors in a 401(k) plan than in an IRA account.

Benz: Well, Chris, those are a lot of helpful pointers and good ways to think about whether a conversion makes sense for you. Thanks so much for being here.

Fahlund: Thank you.

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