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Roth IRA Conversion Quiz

 

Your Initial Financial Plan:

 


Looking For a CPA, Lawyer or Financial Advisor who has worked with lots of other newlyweds and is familiar with the issues that affect you?  

Should you convert your IRA to a Roth IRA??

Each year that your income is less than $100,000, you're allowed to convert some or all of your traditional IRAs to a Roth IRA.  (Effective 2010, the income limitation no longer applies.) By doing so, you'll take IRA money that is growing tax deferred and turn it into Roth IRA money that grows tax-free.  The downside to converting is that you owe taxes on the amount converted.  

Should you consider converting your IRAs to a Roth IRA?  To help you decide what to do, we've prepared this Roth IRA Conversion Quiz.

Please answer the following ten questions. When you are done, simply add up your score, and compare your score with the table found at the bottom of this page to determine whether you should consider converting your IRA to a Roth IRA.

Question 1: How many years before you anticipate taking distributions from your IRA or Roth IRA?

  • More than 20 years (2 points)

  • 10 - 20 years (4 points)
  • 5 - 10 years (6 points)
  • Less than 5 years (8 points)

 
Question 2: At what rates do you think you will pay taxes in the future? (Currently, there are five tax brackets: 15%, 28%, 31%, 36%, 39.6%.)

  • You will be taxed at a much higher tax rate in the future. (2 points)

  • You're not sure, but you're fairly certain that your tax rate will NOT decrease in the future. (4 points)
  • Once you retire, you will be taxed at a lower tax rate. (6 points)
  • The whole tax system is going to change within your lifetime and you will not pay any income taxes in the future. (8 points)

 
Question 3: Will you be in a different tax bracket in the near future?

  • You anticipate a dramatic change in your job situation and see yourself earning significantly more money starting next year. (2 points)

  • You anticipate that your earnings will increase during the next few years to the point that will you will be taxed at a higher tax bracket. (4 points)
  • You anticipate that your tax situation will not change substantially during the foreseeable future. (6 points)
  • You anticipate that, in the foreseeable future, you will have very little taxable income as a result of returning to school, retiring, taking a sabbatical, or for any other reason. (8 points)

Question 4: How will you pay the taxes that will be due in connection with the conversion? Remember, the taxes on the conversion will be due in the year of the conversion.

  • You currently have enough money sitting in a savings account to pay the taxes that will be due. (2 points)

  • You will be able to adjust your withholding at work to cover the additional taxes that will be due without impacting your family budget too badly. (4 points)
  • The money needed to pay the taxes is fully invested in stocks and mutual funds. To pay the taxes that will be due, you will need to sell some of those investments. (6 points)
  • You will not be able to come up with the money to pay the taxes on the conversion without withdrawing money from the Roth IRA. (8 points)

 
Question 5: Do you trust the government not to change the rules as they pertain to Roth IRA's?

  • Over your lifetime, the government will not change any of the rules pertaining to Roth IRA's. (2 points)

  • The rules will change, but amounts contributed to your Roth IRA prior to the date that the rules are changed will be grandfathered and, therefore, not subject to income taxes when withdrawn. (4 points)
  • While you're hopeful that the rules pertaining to Roth IRA's won't change, you feel that, during your lifetime, distributions from Roth IRA's will be subject to some level of income taxes. (6 points)
  • There is no way that, during your lifetime, the government will not begin to tax distributions from Roth IRA's. (8 points)

 
Question 6: How do you feel about pre-paying income taxes to the government?

  • You're not opposed to pre-paying income taxes today if you can save significant taxes in the future. (2 points)

  • You'd prefer not to have to pre-pay any income taxes, but the many benefits of the Roth IRA make it acceptable. (4 points)
  • You have trouble rationalizing pre-paying taxes today; especially when you have no guarantees as to what the tax rules will be like when you begin to withdraw money from your IRA's. (6 points)
  • You only pay taxes to the government when you're absolutely required to pay them and would never even consider pre-paying as little as one dime in taxes to the government. (8 points)

 
Question 7: At what age will you begin to withdraw money from your IRA or Roth IRA?

  • You plan to wait as long as possible before taking any distributions from your IRA or Roth IRA to maximize the tax deferred growth. (2 points)

  • You won't need the money when you retire, but you view the money in your IRA or Roth IRA as your savings and you plan to spend some of it during your lifetime. (4 points)
  • You will retire with a moderate amount of savings, but will PROBABLY need to begin taking withdrawals from your IRA's around the time you turn 70. (6 points)
  • You will have few assets in addition to your IRA's when you retire, so you will DEFINITELY begin taking distributions from your IRA or Roth IRA before reaching the age of 70. (8 points)

Question 8: How do you feel about your heirs paying income taxes on the balance in your IRA's and Roth IRA's that they will eventually inherit?

  • You'll do whatever it takes to minimize the taxes that your heirs will pay on amounts that they inherit from you. (2 points)

  • You'd be willing to pay some taxes now to have your heirs avoid being subject to income taxes on the IRA's and Roth IRA's that they inherit. (4 points)
  • You would regret if your heirs had to pay a lot of taxes on their inheritance, but you wouldn't be so upset that you would consider paying some taxes in advance. (6 points)
  • The fact that your heirs might be subject to income taxes on the IRA's that they inherit doesn't bother you in the least. (8 points)

Question 9: How do you feel about the long-terms prospect of your IRA investment portfolio?

  • You're confident that the stock markets will ultimately return to their historical growth rates of more than 10 percent per year . (2 points)

  • You don't think we'll ever see growth like we saw in the 90's, but feel that you can come up with a diversified portfolio that will get you a decent return. (4 points)
  • You've become risk adverse and will invest only in very conservative investments. (6 points)
  • You feel that the markets are still overvalued and will continue to go down in value in the short-term. (8 points)

Question 10: How do you feel about withdrawing money from your IRA's for education costs, medical expenses, or other uses?

  • You view money in your IRA's as available to be used in a financial emergency (excluding education or medical expenses) and would reluctantly withdraw money from your IRA's if a cash crisis were to arise. (2 points)

  • You would not even consider invading your IRA's prior to your retirement. (4 points)
  • You have a tendency to spend every dime available to you and would most likely end up withdrawing money from you IRA's UNLESS the amounts withdrawn were subject to income taxes and the 10% premature distribution penalty. (6 points)
  • In the future, you intend to use the money in your IRA's to pay for your family's education or medical expenses since there won't be any other source of money available to you at that time. (8 points)

Bonus Question: What will your income be this year? If you're married, you need to determine what your combined income will be.  (No longer applicable as of 2010 when the income threshold disappears.)

  • Your adjusted gross income  will be less than $100,000. (0 points)

  • Your adjusted gross income will be greater than $100,000 (100 points)


The Results

Total up the points from each question. If your score is:

  • Less than 30, you should DEFINITELY consider converting your IRA to a Roth IRA this year.

  • Between 31 and 42, you should PROBABLY consider converting your IRA to a Roth IRA.
  • Between 43 and 48, you have a TOUGH DECISION to make.
  • Between 49 and 60, you should PROBABLY NOT consider converting your IRA to a Roth IRA.
  • Greater than 60, you should DEFINITELY NOT consider converting your IRA to a Roth IRA.

 

 

 

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