Almost exactly a year ago, I pondered whether to convert my Traditional IRA into a Roth IRA. I ended up not doing it right away after realizing that I might hit the ceiling that limits conversions to those with a modified adjusted gross income (MAGI) of $100,000 or less. the same ceiling applies for both a single person and a married couple’s combined income! and if you go the married filing separately route, you can’t convert your IRA at all. I never understand these marriage penalties.

Of course, then I quit my job in July so I should have just gone ahead and converted it. But then I thought, maybe we might even end up in the 15% tax bracket for 2006! that would really save on taxes. But it doesn’t look like it (which is a good thing of course.) So we’ll most likely convert this year. some additional things I want to take into account are:

1) I recently rolled over my 401k into a Rollover IRA. So that’s a total of $23,600 of pre-tax money I can convert to a Roth. that would also leave a pretty big tax bill upon conversion. I’ll see if I can put paying that off until the end of the year.

2) I want to do a SEP IRA for my 2005 self-employment income, which I haven’t set up yet. If I set it up in 2006, can I go ahead and just convert this to a Roth IRA the next day? I haven’t read anything specific saying that I can or can’t do this. If this is allowed, why can’t people just open up a Roth SEP IRA directly?

3) Finally, all those Should-I-Convert calculators and scenarios assume that the tax rates will stay the same for the next 40 years, and that Roth IRA distributions will remain untaxed. But how sure are we of that? Maybe a 50/50 mix of pre-tax and post-tax money would be better.

For those of you that are also pondering converting their Traditional IRAs, this Fairmark Guide to the Conversion Decision is the best online resource I have found. It’s long, but very thorough.

Traditional IRA to Roth IRA Conversion Revisited » My Money Blog