(A note to the reader: We've replaced a random beachgoer's usual companion with a Foolish retirement writer. Let's see whether he notices.)

Dude, it's summer. We're on the beach. Why are you sitting there writing about IRAs? I don't want to think about IRAs while I'm sitting on the beach. Let's go get a beer or something.

Honestly? I don't, either. But listen up, Fool: Managing your finances is a year-round job. Don't let this ruin your vacation, but if you're planning on making big IRA contributions for this tax year -- and you should be -- you might want to start now. It's a lot easier for most of us to put aside a little bit every month than it is to scrape up several thousand dollars right before the April deadline. Most IRA providers will be happy to accept your contribution in dribs and drabs over the course of the year.

And if you're thinking of doing a Roth conversion, you'll definitely want to plan ahead.

Wait, a what? A Roth conversion? Whazzat?

That's when you take a traditional IRA -- the old-fashioned kind, where the money goes in tax-deferred, and you pay taxes when you withdraw -- and convert it into a Roth IRA. With a Roth IRA, your investments grow tax-free, and you don't owe anything when you withdraw.

It's also a good way to leave money for your heirs. Roths have no rules requiring you to take distributions when you're retired, so the money can keep growing, and you can pass it on free of income-tax obligations. It's definitely something to consider if you think you'll be able to fund your retirement from other sources.

Hang on. Won't I owe a ton of taxes when I take the money out of my old IRA?

You bet. That's why you need to plan ahead. A conversion works best when you can pay the taxes out of non-IRA money. If we're talking about a substantial sum, you'll want to start figuring out how to deal with the tax bill well ahead of time.

Sounds like a pain. Who would want to do this?

You might be a candidate if:

  • You expect to be in a higher tax bracket when you retire.
  • You think you may exceed the Roth income limits in the near future.
  • You can afford to pay the taxes.
  • You want to avoid the traditional IRA's requirement to start taking distributions at age 70 1/2.
  • You think your investments are likely to appreciate significantly in the future, and you want to get the taxes out of the way now.

You can figure it out for sure using the Fool's handy-dandy Roth conversion calculator.

Dude, you just spoke in bullet points!

If you're young -- say, under 30 or so -- and you have a traditional IRA but no Roth IRA, you should definitely consider this move.


Because your total contributions and investment gains will likely be relatively low at this point -- low enough that you can probably pay the taxes without dipping into your existing IRA holdings. Since you're planning on 30 to 40 years of growth, why not get rid of the tax obligation now?

If you're Foolish enough to have an IRA before you're 30, you're probably Foolish enough to pick great stocks like Google (NASDAQ:GOOG), Washington Mutual (NYSE:WM), and Johnson & Johnson (NYSE:JNJ) to invest in. Would you rather pay taxes on a year or two of gains on those great stocks -- or on 40 years' worth?

What if I'm older?

Then the case isn't as clear-cut. Check out that calculator, and read Fool David Braze's comprehensive discussion of Roth conversions for more details on the key considerations -- and to see who's eligible. Your income might be too high to qualify. Note that if you have a larger balance, you'll have a larger tax liability when you convert -- which makes it even more important to start planning now.

Huh. Thanks, dude.

No problem. Get me a beer and a copy of Barron's while you're up.

For more great beach reading, check out the Fool's Rule Your Retirement newsletter. It's chock-full of helpful tips and thought-provoking ideas to help you get the most out of your retirement planning. As always, you can try it free for 30 days.

Fool contributor John Rosevear does not own any of the stocks mentioned in this article. Washington Mutual and Johnson & Johnson are Income Investor recommendations. The Motley Fool's disclosure policy does not condone drinking while investing.