Schwab Offers Five Tips for Investors Considering a Roth IRA Conversion

New Rules for New Year Prompt Need for Professional Help and Guidance

Wednesday, November 18, 2009 6:00 am PST



Public Company Information:


SAN FRANCISCO--(BUSINESS WIRE)--Starting January 1, 2010, income restrictions for converting to a Roth IRA will be lifted, allowing individuals who make more than $100,000 adjusted gross income to convert assets from certain retirement savings accounts, such as a traditional IRA or 401(k) with a previous employer, to a Roth IRA (restrictions may apply to residents in certain state(s)*). A recent survey from Charles Schwab found that 34 percent of respondents are still unsure of the general benefits of a Roth IRA versus a traditional IRA and, further, more than one quarter find the details of converting more confusing than healthcare reform.

“The pros and cons of a Roth IRA conversion can be complicated, which is why we strongly encourage investors to discuss the decision with a financial advisor and a certified tax planner based on their individual circumstances and overall retirement savings strategy and objectives,” said Rande Spiegelman, vice president of financial planning for Schwab.

Schwab is offering clients live, personalized guidance and analysis regarding Roth IRA conversions including a discussion of key Roth IRA considerations and a customized report that includes:

  • A comparison of an individual’s estimated financial results with and without a Roth IRA conversion,
  • The estimated taxes due from the conversion and the potential impact on an individual’s current tax bracket,
  • And the impact of various scenarios to keep in mind when evaluating various conversion amounts.

To better inform investors, Schwab has also outlined five considerations to help drive the conversation with a professional advisor about the 2010 Roth IRA conversion opportunity:

Five Tips When Considering a Roth IRA Conversion

  1. Some can be better than none: If you are unsure of your future tax bracket, feel that tax rates may rise over time or can’t afford to pay the total tax incurred upon conversion, you may want to consider a partial Roth conversion. By converting some funds to a Roth IRA and leaving funds in your traditional IRA, you are diversifying your tax strategy and hedging for either scenario – if tax rates go up in the future (which would likely favor a Roth conversion) or in the case they go down (which would likely favor the traditional IRA). You can choose to convert any amount, so choose an amount that will generate a tax payment you can afford and tolerate.
  2. All in the family: If you do not believe you will need to utilize your IRA to live off of in retirement (including emergency expenses such as health care) and your goals include maximizing the assets you leave to heirs and beneficiaries, a Roth IRA can offer some unique estate planning benefits. Though the value of a Roth will still be included in your gross estate, the account could grow larger than it otherwise might under traditional distribution rules since there are no required minimum distributions with a Roth—leaving more for your heirs. Also, your beneficiaries can make income-tax-free withdrawals during their lifetimes. What's more, income tax you pay on conversion (preferably from assets other than the IRA) will reduce your taxable estate. In effect, you're prepaying income tax on behalf of future beneficiaries without such payment being recognized as a taxable gift.
  3. Tax time on your time: You don’t have to pay Uncle Sam all at once, although in some cases, you might want to. 2010 conversions can be reflected in 2010 income by making an election or, by default, split across 2011 and 2012 income years (2012 and 2013 tax filings). Keep in mind that income tax rates are set to rise in 2011 under current tax law. If a conversion makes sense and you expect your tax bracket will rise in 2011 and 2012, you might want to elect to include all the conversion income in 2010.
  4. Stay out of the tax penalty box: If conversion is right for you, but you need to access funds in your existing IRA within five years, consider leaving the portion you will need to access in your traditional IRA and converting a portion of the unneeded funds to a Roth IRA. This will afford you the benefits you seek in a Roth IRA while enabling you to make withdrawals from your traditional IRA penalty-free, assuming you are over the age of 59½. If you are not over the age of 59½ and you think you may need to access the funds in your IRA in the next five years, bear in mind that you will incur penalties in either case.
  5. Oh tax planner, my tax planner: Forty-nine percent of respondents to Schwab’s Roth survey reported that they would consult a tax planner before they made any Roth decisions, which, for many, is the right approach. This can be a complicated, individual decision with financial and tax components, so be sure to consult a professional tax advisor in addition to a financial advisor.

Schwab has additional tools and online resources including a Roth IRA Conversion Calculator, Roth IRA Conversion Q&As, and key considerations for Roth IRA conversions available on Schwab’s Roth-dedicated site: Schwab will continue to add information and resources to the site as the January 1, 2010 conversion rule change date approaches.

*Changes to Roth IRA conversion income limit rules may not apply in all states. Certain states may impose penalties on conversions above the current income limits. Consult with a tax advisor for more information.

This information is for general information purposes only and is not intended as a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends you consult with a qualified tax advisor, CPA, financial planner or investment manager.

About Charles Schwab

The Charles Schwab Corporation (Nasdaq:SCHW) is a leading provider of financial services, with more than 300 offices and 7.6 million client brokerage accounts, 1.5 million corporate retirement plan participants, 687,000 banking accounts, and $1.3 trillion in client assets. Through its operating subsidiaries, the company provides a full range of securities brokerage, banking, money management and financial advisory services to individual investors and independent investment advisors. Named Highest in Investor Satisfaction by J.D. Power and Associates, its broker-dealer subsidiary, Charles Schwab & Co., Inc. (member SIPC,, and affiliates offer a complete range of investment services and products including an extensive selection of mutual funds; financial planning and investment advice; retirement plan and equity compensation plan services; referrals to independent fee-based investment advisors; and custodial, operational and trading support for independent, fee-based investment advisors through its Advisor Services division. The Charles Schwab Bank (member FDIC) provides banking and mortgage services and products. More information is available at (1109-11847)

© 2009 Charles Schwab & Co., Inc. All rights reserved. Member SIPC


Charles Schwab
Michael Cianfrocca, 415-667-0344
Pablo Rodriguez, 415-486-3267

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