It might be a good time to switch to a Roth IRA

Plummeting stock prices may be good news for those wanting to convert from a traditional IRA to a Roth IRA.  Converting to a Roth triggers an immediate income tax bill, but the amount of tax is based on the value of the IRA on the date of the rollover.  Thus, lower stock prices may make a Roth conversion attractive.  Once you pay the tax, your rollover Roth IRA will never again be subject to income tax if you follow the rules.

Calculate whether a Roth IRA conversion makes sense.  To decide whether you'd be better off converting to a Roth or leaving your money in a traditional IRA, you must make assumptions about the future.  Important factors to consider include the length of time until retirement, the expected rate of return on your investments, your current income tax bracket, and your projected tax bracket during retirement.  Another consideration is whether you have enough nonretirement assets to pay the income taxes due on the conversion or whether you'll have to tap your IRA to pay taxes.

You can change your mind.  If you converted a traditional IRA to a Roth IRA in 2001 or 2002, you may be regretting your decision if your account has since declined in value.  Fortunately, you can reverse a Roth rollover and eliminate the tax bill you would otherwise face.  If done properly, there will be no income tax due on the rollover.

For 2001 conversions, you have until October 15, 2002, to switch back to a traditional IRA.  If you already filed your 2001 return, you must file an amended return to receive a 2001 tax refund.  For 2002 conversions, you have until October 15, 2003, to reverse a rollover.