Transcripts

"Kevin McCormally's Tax Tips"-Clearing Up The Chaos

SUSIE GHARIB: Thanksgiving is just a week away, but we're looking ahead to tax season. Here with part four of our year-end tips is Kevin McCormally, editorial director at "Kiplinger's Personal Finance." Tonight, Kevin finds a silver lining in the market meltdown.

KEVIN MCCORMALLY, EDITORIAL DIRECTOR, KIPLINGER'S PERSONAL FINANCE: A great thing about taxes -- or at least a great thing for those of us who try to explain taxes -- is how incredibly complicated things are. Take the idea that's being promoted as a savvy year-end move: converting a traditional IRA to a Roth. The thinking is that the market meltdown lets you do this on the cheap. You have to pay tax now on every dollar you convert to a Roth. But if your traditional IRA has been battered by the market, there's less money to convert and therefore it costs less to make the switch and if your money is safely in a Roth when the market recovers, all that growth will be tax-free rather than simply tax-deferred. Now I'm a big fan of Roth IRAs and I believe conversions make sense if your income is under $100,000 and you can afford to pay the tax with outside money, rather than dipping into the IRA to pay the piper. But I'm not sure about the year-end advice. After all, if you convert in December, you have to pay the tax bill next April. If you hold off until January, you put off the tax bill until April of 2010. Now there is a way to have your cake and eat it, too. You can convert to a Roth now and watch how your investments do in the next few months. If you have made a handsome profit, stick with the conversion, pay the tax and root for a recovery. But if the market value falls between now and tax-return time, you can unconvert, changing the account back to a traditional IRA. That would eliminate the tax bill. The one drawback is that you'd have to wait 31 days to reconvert the account to a Roth. Again, please remember: I don't make the rules; I just try to point out the opportunities they create. I'm Kevin McCormally.

KANGAS: You can submit your tax questions to Kevin McCormally and learn more about the stories in tonight's broadcast on our web site. Just go to NIGHTLY BUSINESS REPORT on pbs.org, and look for the "tax tips" logo on our home page. You can also e-mail us at nbr@pbs.org.