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Question for the Money Doctors

Question submitted on Apr 20, 2010.


I have heard that this year people with incomes over the Roth IRA limit can transfer other IRA-type accounts into Roth IRAs. I have a 403(b) account. Is this true, and if so, what is the best way to go about doing this? Thank you.

Answer (answered by Meet the Money Doctors)

It is true that the previous income limit on ROTH IRA conversions is gone. In 2010 and going forward, anyone can convert a retirement account to a ROTH IRA regardless of income.

If your account is large enough to justify the fees and time involved in setting up several IRAs, I recommend that you split your account into as many IRAs as asset classes you intend to invest in. For example, if you were going to own large company US stocks, small company US stocks, international stocks, emerging market stocks, and fixed income investments, I suggest that you open five IRAs and convert each of those to ROTH IRAs. Then, next year (up to October 15th if your return is on extension), you can keep your winners (those accounts that are up) and recharacterize your losers (those accounts that are down). Please remember that the income tax due on the conversion will be due April 15th even if you extend your return to October 15th. The strategy of setting up multiple IRA accounts is usually only justified if the amounts involved are substantial.

The best way to achieve this mechanically is to talk to your IRA custodian and the folks that manage your 403(b) and determine what paperwork they need to achieve the transfers.

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