A Roth IRA Conversion Allows For Tax-Free Withdrawals

A Roth IRA conversion may be a good choice for many investors who have kept their funds in a qualified retirement plan. This directs the financial institution that holds your traditional IRA to convert it to a Roth IRA account. You will maintain the same trustee or custodian of the individual retirement account, but you want a recharacterization of the terms.

There are many factors that go into determining whether you should convert IRA to Roth IRA. With the modified adjusted gross income (MAGI) and tax return filing status requirements being eliminated in 2010, everybody meets the eligibility. While there is no “one size fits all” in investing, you must determine when converting makes sense.

Benefits Of A Roth IRA Conversion

The advantages of a Roth IRA conversion may be numerous, depending on your personal financial situation. One of the biggest differences between Roth IRA vs. traditional IRA is when the money is taxed. A traditional IRA taxes the money at distribution. This is based upon the idea that many people are in lower tax brackets at retirement because income is usually reduced.

A Roth IRA contribution is made with income that has already been taxed. There are no further taxes assessed on the money, including at distribution. This makes a Roth conversion attractive to someone who realizes he will be in the same or a higher tax bracket after retirement. It is best to use tools and resources like a conversion calculator and IRS Publication 590 to see what the best choice is for you.

When A IRA Conversion To Roth Makes Sense

Advantages of a Roth IRA conversion is that you have control over assets and can continue to contribute to a Roth past the age of 70 1/2. A traditional IRA requires mandatory withdrawals at this time and no further contribution limits are enforced. of the many Roth IRA benefits, you can pass a tax-free inheritance to heirs and minimize estate taxes for primary and contingent beneficiaries. You can make qualified distributions without penalty for disability, educational purposes, or to buy a first home.

Drawbacks Of A Roth IRA Conversion

Despite the many advantages to a Roth IRA conversion, there are some drawbacks as well. You can’t access the funds for five years and a longer period is required for the conversion to be most effective. Also, you can only convert from a traditional IRA and not a direct rollover from the likes of 401(k), 403(b), and 457(b).

Because a IRA conversion to Roth is viewed as a distribution by the IRS, you have to pay income taxes on it. Some people ease the payment by making a partial Roth IRA conversion. This roth recharacterization means only part of the taxes has to be paid at one time and making additional rollover contributions are allowed by conversion rules.

Whether or not to convert traditional retirement assets to a Roth IRA can be a complex decision. It is important to take the rules into consideration when determining if a Roth IRA conversion is the best choice for your nest egg.