That $600 savings won't entirely offset the market decline this year, but if stock prices recover before you retire, you will come out ahead.
Converting to a Roth IRA requires careful planning to ensure compliance with IRS regulations. Your best bet is to consult with a tax advisor or study IRS Publication 590 on Individual Retirement Arrangements.
Here are some key points to keep in mind:
To qualify for a Roth conversion, your income as a single or married filer must not exceed $100,000 for 2008. (In 2010, this cap will be lifted for one year.)
You can convert all or just a portion of a given IRA.
To qualify for tax-free withdrawal, converted assets must held in a Roth account for five years or until you reach age 59 ½, whichever comes first.
Beginning this year, you can convert directly from a 401(k), 403(b) or 457 plan of a former employer to a Roth IRA.
Before undertaking a conversion, make sure you have the money to pay the associated tax bill.
Finally, if you convert to a Roth IRA and then there is a substantial drop in the value of the conversion amount, you can change your mind and "recharacterize" the Roth back to a traditional IRA. This recharacterization process means you don't pay taxes on the lost value of the IRA.
This move should be considered by anyone who converted to a Roth IRA early this year before the stock market plunged this fall. The deadline to recharacterize a conversion made this year is Oct. 15, 2009.
But whether it's a conversion or a recharacterization, it pays to know the rules on how to capture the benefits of a Roth IRA if, like me, you'd like to lower your tax bill in retirement.
This work is the opinion of the columnist and in no way reflects the opinion of ABC News.
David McPherson is founder and principal of Four Ponds Financial Planning in Falmouth, Mass. He previously worked as a financial writer and editor for The Providence Journal in Rhode Island. He is a member of the Garrett Planning Network, whose members provide financial advice to clients on an hourly, as-needed basis. Contact McPherson at email@example.com.