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By Christine Benz | 05-04-2010 04:43 PM

IRA Conversions: Tips and Traps

Noted retirement planner Natalie Choate outlines four factors that favor conversion, plus pitfalls to avoid.

Christine Benz: I'm Christine Benz from Morningstar. I'm here at the Investment News Retirement Income Summit. I'm happy to say that I'm joined today by Natalie Choate. Natalie is the author of "Life and Death Planning for Retirement Benefits." She's also one of the foremost retirement planning experts in the country. Natalie, thank you so much for joining us.

Natalie Choate: My pleasure, Christine.

Benz: So, one interesting opportunity that has emerged for retirement planning this year is the lifting of income limits for IRA conversions. You have written a lot about this topic, you had a great piece on key tips and traps to avoid. So let's start with the tips, some things to think about when you are trying to determine whether you are a good candidate for a conversion.

Choate: All right. I think everybody who has a plan or an IRA is now wrestling with this: "Should I convert to a Roth IRA?" It's a tough decision to make, so I'm going to try to make it a little bit easier by one tip, which is that everybody who is in this room, everybody who is watching this, should open a small Roth IRA now, today, if you haven't done it already.

There's two reasons for that. One is that you're going to get your five-year clock started by doing that. Roth IRAs are famous because they have tax free distributions, but actually the distributions aren't always automatically tax free. Your earnings that you get inside the Roth IRA are tax free only if you've had a Roth IRA in existence for five years.

Benz: OK, so starting now, get set, clock running.

Choate: Right! You may be convinced you never want to convert to a Roth IRA but maybe 10 years from now you might change your mind, and if you opened a Roth IRA today you've already passed the five-year clock for your future conversion that you might do.

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