Should you convert your Traditional IRA to a Roth IRA?
Converting a Traditional IRA to a Roth IRA may make sense, but it's not for everyone. The many rules and regulations governing both types of investments can make this decision a complex one. Here are some key issues to think about and discuss with your tax advisor:

Taxes
You'll have to pay income taxes on the IRA assets you've converted. During the year that you convert, the total untaxed portion of your Traditional IRA is added to your taxable income, and you must pay the entire tax bill when you file your income-tax return for that year.

Given this tax impact, ask yourself these two questions:
When I'm ready to withdraw money from my IRA, will I be in a higher tax bracket than I am now?

• If your answer is yes, it might be sensible to convert now and pay taxes at your current tax rate.

Will I earn a higher after-tax return on the money I'll have in my Roth IRA than I would have earned on the money I paid out in taxes because of the conversion?

• If your answer is yes, it might be a good idea to convert now. If you would like help analyzing this, check out our Roth IRA Calculator for a preliminary personal investment review. Then call your tax advisor and validate what you've done.

Deadline
The deadline for completing a Roth IRA conversion this tax year is Dec. 31, which is three-and-a-half months earlier than the deadline for making a contribution to either a Traditional IRA or a Roth IRA. Important questions to answer before you convert your IRA:

Income
What will my adjusted gross income (AGI) be this year?

• You cannot convert from a Traditional IRA to a Roth IRA if your AGI is more than $100,000, regardless of whether you are single or married and filing jointly. If you are married and filing separately, you are not eligible to convert, regardless of your income. Important note: The AGI used to determine IRA conversion eligibility is not exactly the same as that which appears on your tax return. For purposes of conversion, AGI includes several items that were excluded when AGI was determined on your tax return, such as the loan interest deduction, income left out as a result of the foreign-earned income exclusion, and deductions claimed for foreign housing.
• Withdrawals you make from your IRA before you convert it will be included in your AGI to determine whether you qualify to convert. For example, if you took money out of your IRA to pay taxes, those withdrawals, when added to your IRA assets, could push you over the $100,000 AGI limit.
• After you convert your Traditional IRA to a Roth IRA, all taxable money in your Traditional IRA is included in your taxable income, so it could raise your tax bracket and further increase your income taxes.

Age
What special circumstances apply if I'm older than 70½ years of age?

• At age 70½, you must take a minimum distribution out of your Traditional IRA, and the amount of the required minimum distribution may not be converted to a Roth IRA. Effective Jan. 1, 2005 your required minimum distribution will not be included in your AGI.

More about taxes and penalties
If I convert to a Roth IRA, should I pay income taxes with money withdrawn from my traditional IRA?

• Once you convert, think carefully about withdrawing money from your Roth IRA to pay your income taxes. If you take money out of your Traditional IRA to pay taxes before you convert, your withdrawal will be added to your AGI. Be sure you don't exceed the $100,000 income limit.
• If you're younger than age 59 ½ and you want to withdraw earnings from your Roth IRA, you'll suffer an automatic penalty of 10% unless you qualify for an exemption such as disability or qualified medical expenses. The penalty is payable whether you withdraw the money to cover your taxes before or after you convert.

Estate planning
Is there any estate planning benefit if I convert to a Roth IRA?

• You and your family's estate-planning professional are the only ones who can thoroughly answer this question, but here are some rules of thumb: If you have a significant amount of money in your Traditional IRA, converting may help you to lower your taxable income in future years. Qualifying withdrawals from a Roth IRA are free of current federal income tax. By converting to a Roth IRA, you also pre-pay the income-tax liability, which may be helpful to those who inherit your Roth IRA.

Reverse procedures
Can I reverse a Roth IRA conversion?

• Yes. Typically an investor might have two reasons for doing this:
  
  
  1. If you get a bigger salary raise or bonus than you anticipated, and your AGI at the end of the year ends up being higher than the $100,000 limit established for a Roth IRA, or you simply may have miscalculated your income.
  2. The second possibility is that market fluctuations may have driven down the value of your IRA portfolio. When you convert from one IRA to the other, your income-tax liability becomes based on the valuation of the IRA on the date you convert. You have a limited period, however during which you're allowed to reverse the conversion through a custodial transfer. You can reverse the conversion until October 15 of the year following the year of conversion.

Making it happen
How do I convert my Traditional IRA to a Roth IRA?

• Let your IRA custodian (or trustee) know that you want to convert your Traditional IRA to a Roth IRA.
• If your Traditional IRA is at Nationwide Funds, you simply need to complete, sign and return a new IRA application and an IRA Transfer/Rollover form.
• If your IRA is not at Nationwide Funds, you have two choices: You can convert your Traditional IRA at your current custodian or you can move it to Nationwide Funds and convert it once it gets here.
• Either way, be sure to complete the conversion by December 31 of the year you want the conversion to take place. That's the deadline for Roth IRA conversions.

NOTE: Please consult your tax professional regarding your specific needs.