When to change — or stretch — your IRA

During the last few weeks, I've written about what people plan to do after retirement.

Today, I'm writing about what you should do financially so you can put those plans into action.

Several readers have recently had questions about individual retirement accounts, or IRAs.

"I am 52 with two-thirds of my retirement in an IRA," reader David wrote in an e-mail. "I'd like to move it to a Roth IRA so I know exactly how much I have, since all taxes will have been paid. Is it better to leave it where it is, or beneficial to convert it to a Roth?"

For help with this week's questions, I contacted Alan B. Tingey, principal at Cannon Tingey Investment Advisors in Salt Lake City.

Alan says that, assuming a person is eligible for such a conversion, he must consider several economic factors.

"The economic decision has largely to do with a comparison of the current tax bracket with the anticipated tax bracket at retirement," Alan wrote in an e-mail response to David's question. "A traditional IRA is a vehicle that allows pretax funds to grow tax-deferred until retirement — at which time the entire distributions are taxed at the then ordinary income tax rate. Alternatively, a Roth IRA is a vehicle that allows after-tax funds to grow tax-free such that no taxes are due upon distribution.

"If an investor converts his traditional IRA into a Roth IRA, he must recognize the entire amount of the IRA as income in the year of conversion and pay the associated taxes; but the advantage comes at the time of distribution when no taxes are due."

The general rule, Alan wrote, is that the wider the gap between today's tax bracket and your anticipated tax bracket at retirement, the less incentive you have to convert today.

"For example, if your 52-year-old reader that is contemplating conversion to a Roth IRA is currently in a 35 percent combined tax bracket and anticipates dropping to a 22 percent combined bracket at retirement, it will most likely not be advantageous to convert," Alan wrote. "Alternatively, if his tax bracket is expected to stay at 35 percent through retirement, he should probably convert to a Roth now.

"On the other hand, if he is currently in a 23 percent bracket and anticipates dropping to a 20 percent bracket, conversion today seems advantageous; however, he needs to be aware that, depending on the size of his IRA, conversion alone may boost his marginal tax rate in the year he converts."