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Should you convert your Traditional IRA to Roth IRA? That's a difficult question and the answer will depend on several things, including how far away you are from retiring, how much untaxed earnings and contributions you have in your traditional IRA and how soon you want to start withdrawing money from your IRA. But if your IRA has shrunk in recent years, you might want to convert. If you invested $10,000 in an IRA and it's only worth $5,000 today. When you convert, you'd pay $1,500 in taxes at the 30 % federal tax rate vs. the $3,000 you would have owed on a $10,000 balance.

If you convert money over to a Roth IRA, there is no 10% penalty, but you owe taxes on any contributions and earnings. However, there are no minimum distribution requirements for Roth IRAs, and you may contribute to a Roth IRA for as long as you want, provided you have compensation. Also, you may only convert to a Roth IRA if you're single or married filing jointly and your adjusted gross income is less than $100,000. If you are married and filing separately, you cannot convert to a Roth.

If you converted to Roth IRA and its value keep falling, you may also reverse the conversion by "recharacterizing" your Roth IRA to a traditional IRA and if you paid taxes already, you'll get a refund by filing an amended return with the IRS. The Roth Conversion IRA (all contributions and income generated from the account) must be transferred to a traditional IRA before the due date of the individuals' tax return for that year, including extensions. The transfer must be a trustee-to-trustee transfer, not a rollover.

A conversion has both advantages and disadvantages that should be carefully considered before you make a decision. Use this online calculator to determine if converting to Roth IRA is a good idea.

The following chart summarizes the similarities and differences of the Roth and Traditional IRAs

Roth and Traditional IRA Participant Contribution Comparison
	Roth IRA	Traditional IRA
Contribution Limit	$3,000 for tax year 2002 Plus $500 catch up for those at least 50 years old by year-end 2002	$3,000 for tax year 2002 plus $500 catch up for those at least 50 years old by year-end 2002
Deductibility	Contributions are never deductible	Contributions may be deductible, depending on tax filing & active participant status, as well as income amount
Age Limitation	No Age limitations on contributions	No contributions allowed after and including the year the taxpayer attains age 70 �.
Tax Credit	Available for Tax Saver's Credit	Available for Tax Saver's Credit
Income caps for contributions	Income caps may prevent taxpayers from contributing.	No income caps that will prevent taxpayers from contributing.
Treatment of earnings on IRA investments	Earnings grow on a tax-free basis. Qualified distributions are tax-free.	Earnings grow on a tax-deferred basis. Earnings are added to taxable income for the year distributed.
Distributions Rules	Distributions may be taken at anytime. Distributions will be tax and penalty free if investor is qualified.	Distributions may be taken at anytime. Distributions will be treated as ordinary income and may be subjected to early withdrawal penalty if withdrawn while under the age of 59 �.
Required Minimum Distribution	Owners are not subjected to the RMD rules. However, beneficiaries are subjected to minimum distribution requirements.	IRA owners must begin distributing minimum amounts, beginning April 1 of the year following the year they turn age 70 �. Beneficiaries are also subjected to minimum distribution requirements.

Be sure to consult with your tax professional, as there are usually other factors that could determine which options are more suitable to meet your financial needs.

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Retirement: Converting and Recharacterizing of an IRA