The Implications of a Roth Conversion

Don't be blinded by the extra income you could gain from a Roth conversion. In combination with the possible expiration of George W. Bush's tax cuts, a Roth conversion could have serious implications for your wallet.

Most taxpayers know that they can convert a traditional IRA into a Roth this year regardless of how high their income may be. And they know a conversion can lead to tax issues, since any amount converted from the IRA is considered taxable income.

According to tax consultants, however, some consumers are focusing on the tax that may be owed on the amount being converted and losing sight of other impacts that the added income may have.

One possible downside of converting to a Roth is that the added income could push you into a higher tax bracket. If a couple filing jointly has a combined income of $200,000 and converts a $20,000 traditional IRA into a Roth, that would push them from the 28% bracket into the 33% bracket. And even though the IRS will let you split the income from the conversion between the 2010 and 2011 tax years, there’s a chance that the tax brackets in 2011 will revert to the levels that were in effect before the Bush tax cuts. That makes it more likely that the extra income from a Roth conversion will push you into a higher bracket for that year.

There are further implications for seniors. Those on Medicare could see their Part B and Part D Medicare premiums jump if the conversion pushes their income above a certain level. More likely, however, is that any conversion would put their income above the level where some of their Social Security benefits become taxable. For the rules and income limits on taxing Social Security benefits, go to adds up to the fact that converting a traditional IRA can be far more complex than you think. Before you make any moves, talk to a tax professional about your situation.