For the last 2 years the big news trumpeted by the financial planning community was the ability to convert your traditional IRA to a Roth IRA. A concept I believe is going to cause nothing but trouble for people.
Last week, the President signed a bill allowing for a much better alternative, the ability to convert your “traditional” retirement plan assets (think profit sharing and 401k plans) into Roth retirement plan assets.
There are a number of reasons this is so much better than an IRA Roth conversion.
The first is that IRAs are riddled with prohibited transaction issues, the IRAs are going to be considered fully distributed when people wake up.
The other is that you can’t borrow money from an IRA, you can with the Roth. If you run out of money and can’t pay the taxes due on the Roth conversion, just borrow it out of the retirement plan, in a non tax manner of course.
Another is asset protection. Some states have limits on the asset protection provided to IRAs, that is if they haven’t engaged in a prohibited transaction and thus lost all asset protection. 401ks typically have much higher levels of asset protection and a single prohibited transaction doesn’t cause them to lose their exempt status.
If someone tries to talk to you about converting your IRA to a Roth, ask them about converting your profit sharing plan to a Roth account plan. If they don’t know what you are talking about, move on.