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By Christine Benz | 10-19-2010 12:30 PM

Wait and See on Taxes and Roth Conversions

With the uncertainty surrounding tax rates in 2011 and beyond, Vanguard's Maria Bruno thinks investors should wait until taxes are actually due before making a decision on the treatment of a Roth conversion.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. I'm here in Vanguard's office with Maria Bruno. She is an investment analyst for Vanguard. Maria, thanks so much for sitting down with us today.

Maria Bruno: Thank you Christine.

Benz: So, Maria, you've written and talked a lot about converting a traditional IRA to a Roth IRA. Curious to hear whether Vanguard is seeing a decent rate of adoption of Roth conversions.

Bruno: Conversions this year, yes.

Benz: Yeah.

Bruno: Actually, Christine we have, and we did see an uptick earlier in the year, which was expected as the income limitations were lifted early in the year. We expected to see an influx of conversions, and we did. I think year-to-date, we are seeing conversions up about five times greater than they were last year at this time. We do expect the momentum to continue as we get closer to the year end.

I think I like to stress that, while conversions may be good. We really want to make sure we have the right conversions. So our goal has been really to educate our investors through tools, calculators, education on the web, et cetera.

Benz: Right. So, one think I have been hearing from Morningstar.com users is that they are thinking about this option, if they do a conversion they can defer the taxes into 2011 and 2012.

Bruno: Yes.

Benz: And yet, tax rates are poised to go up in 2011. So, people are wondering, how should I think about that decision making? Do you have any tips for people in that situation?

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