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I've been recently married for the first time and my husband and I have been trying to put together a coordinated strategy for our retirement savings, including what to do with our respective retirement accounts. His story is a little wackier, but here's my question:

I was a corporate consultant for 3 years in my early 20's, so I had a respectable 401(k) balance. I also opened a Roth IRAs at the time. But since then I've left for a much lower-paying job working at a private school. I rolled my 401(k) into a Rollover IRA when I left, because there were ridiculous restrictions on the investments allowed while it was under my old employer's umbrella, and have been happy with its performance so far. I've also joined the 403(b) program at my school, and I max that out.

Husband has a Roth also, and we have decided to start maxing out our Roth contributions going forward, something we weren't really doing before. But I have another question - is it possible to convert my Rollover IRA into a Roth IRA, even though I already have one? And if so, should I?

It seems like I should, because our tax rate is pretty darn low right now, as I make under $50K and he gets an almost tax-free stipend as a PhD student. He is getting a medical degree at the same time, too, so eventually we won't be the frugal grad-student life-types we are now - maybe moving up a number of tax brackets throughout our lives. Maybe it's better to pay taxes now. And we're just under 30, and have a long time to save. But I'm not sure what criteria or rules of thumb I should be looking at. And am I missing something big about the tax code? I don't know much about taxes at all, mine are always so simple. Or retirement? Will tax rates *always* be lower during retirement?

Thanks for the help...(Chitown99)
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Welcome Chitown. Glad you could join us.

First, keep in mind that IRA and Roth IRA are individual accounts. Hence, you must keep yours separate from your husbands. However, in considering things like asset allocation, you can consider them collectively.

You are allowed to have as many IRA and or Roth IRA accounts as you like under the law. Administrative paperwork and maintenance fees are the reason most people try to minimize the number of accounts they maintain.

So yes, you can do a Roth conversion on an existing traditional IRA while you own another Roth account. You can even combine the two accounts into one if you like.

As to whether or not you should, yes it depends on what your tax rate is now compared to what it is likely to be in retirement. Having a low tax rate now is an excellent reason to convert now.

Tax rates are always difficult to predict in the distant future. Congress can change the law and those rates at any time. However, most of us see no reason to believe costs of government are going to go down, and income tax remains the major source of tax revenue. I would be surprised to see tax rates below 15% in retirement. And if your investments do well, careers prosper, and you have say nice pensions to retire on, tax rates of 35% or more are not uncommon.

So if you are in a low tax rate now, I would take the risk and do the Roth conversion (as long as it is not so large that it puts you into a higher tax bracket). If it is a large account, then partial conversions limited by those tax brackets over a period of years might be preferable.

Good luck.
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Chitown99: "But I have another question - is it possible to convert my Rollover IRA into a Roth IRA, even though I already have one? And if so, should I?"

Paul has already given you a solid response.

I would like to elaborate on one issue I did not see addressed in his post. Do you have the funds to pay the taxes due on the conversion without tapping into the IRA? If not, and you keep/use some of the IRA to pay the taxes, that withdrawal will trigger a 10% penalty on the amount withdrawn, and likely make the conversion make less sense.

Apart from this liquidity issue, conversion is mostly a bet about current income tax rates versus (future income tax rates or replacement taxes). For example, what if the FairTax or another national sales tax system is implemented, and you still need to pay taxes on the Roth IRA money when you spend it?

Last, while a long way off in your future, IIRC, Roth IRAs currently have no required withdrawals, but regular IRAs do have an annual withdrawal requirement once you reach 70 1/2.

Regards, JAFO

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Thanks so much, guys, for your careful responses! Liquidity is an excellent point, especially as I didn't know about the extra 10% penalty! But luckily we still have those wedding checks sitting in our account. Perhaps their purpose in life is to pay for the conversion. The balance is not enough to bump our tax bracket, I'm pretty sure.
Thanks again! Glad to be here.
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