We believe that most investors should consider having a Roth IRA as part of their overall retirement plan because they offer tax-free growth potential and withdrawals,¹ which may help minimize taxes and maximize retirement savings. The decision to convert needs to be made with care and should include a consultation with your tax advisor.

There are three keys to determining if converting may be right for you.

The decision to convert a Traditional IRA or other eligible balance to a Roth IRA is not a simple one, and should always be made in full consultation with a tax professional, an investment advisor, or both.

Since a Roth conversion is a taxable event (in other words, you will have to pay taxes on the amount of money you are converting), we recommend that you attempt to minimize the total cost of conversion. When determining how much to convert, you may want to consider how much money you have set aside in non-retirement sources to pay the resulting taxes. You may also want to consider converting to a Roth IRA over a number of years (tax periods) in amounts that will keep the income from the conversion within your current tax bracket, or within a federal tax rate that you are comfortable with.

To help maximize your retirement savings, we believe that you should consider not using the proceeds from the conversion to pay the resulting tax costs. Instead, you should consider using cash or other savings held in non-retirement accounts. Using funds from the retirement account to pay the taxes will reduce the amount you would have available to potentially grow tax free in your new Roth IRA. Additionally, if you are under 59½, using funds from your retirement account could result in an additional 10% tax penalty which may significantly reduce the potential benefit of conversion.

You should weigh this option carefully and consult your tax advisor. Generally, Fidelity believes the risks associated with deferring taxes over 2011 and 2012 may outweigh the benefits.

Potential risks of deferring:

In January 2010, there will no longer be an income limit on Roth IRA conversions. If you convert in 2010, you will also be able to spread the tax payment over two years, in 2011 and 2012.

If you think your tax rate will be the same or higher than your current rate when you withdraw your money, it may make sense to pay the tax liability now, in exchange for the opportunity for federal tax-free growth and future distributions. There are no minimum required distributions (MRDs) during the lifetime of the original owner. While a conversion to a Roth IRA requires you to include taxable assets you're converting in current income, it enables you to avoid future federal taxes on any subsequent Roth IRA earnings and withdrawals (if certain conditions are met). Please speak to your tax advisor for more information.

You may be able to convert the following account types to a Roth IRA:

Yes. If you qualify, you can choose to roll over assets from your 401(k) directly to a Roth IRA- eliminating the need to roll into a Traditional or Rollover IRA and then convert to a Roth IRA. Similar to converting to a Roth IRA, you'll owe taxes on the amount of pre-tax assets you roll over. Note, if you have assets in a Roth Designated Account (i.e., Roth 401(k)) and would like to roll these to an IRA, you can only do so to a Roth IRA.

Prior to 2010

You'll qualify to convert your Traditional IRA to a Roth IRA as long as your modified adjusted gross income (MAGI) is $100,000 or less.² This limitation applies not only to single filers, but also to married people filing jointly. If you're married filing separately, you're only eligible to convert if you've lived apart from your spouse for the entire taxable year.

Starting in 2010

The income limit will be removed in 2010.³ A provision in the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) will allow more people to convert to Roth IRAs by removing the modified adjusted gross income limitations (MAGI) on conversions from a Traditional IRA to a Roth IRA. Under the provision, you may be able to spread your tax liability on amounts converted in 2010 over tax years 2011 and 2012. Contact your tax advisor to determine if this change makes sense for you.

You'll owe taxes on the amount of your IRA that's converted. But, unlike Traditional IRA withdrawals before age 59½, there's no penalty involved.⁴

There are a number of factors to consider to help you decide how much to convert, including how to minimize your tax bill. Consider these questions:

Fidelity believes you should use cash from a non-retirement savings or brokerage account to pay the taxes, instead of using the proceeds from the conversion.

One of the features of a Roth IRA is the ability to recharacterize (revert) back into a traditional IRA if your situation changes:

You should consult a tax advisor to more fully understand the regulations surrounding conversions.

The decision to convert early or late in the year depends on a number of variables:

Deciding whether to convert to a Roth IRA is not a simple decision. Before you begin the process, there are things you can do to prepare.

Converting to a Roth IRA will not satisfy your MRD-you will need to take your MRD before you convert. If you are required to take a distribution, you must take it before converting to a Roth IRA.