The Roth IRA plans are so attractive that, in addition to opening a deposit Roth IRA, you may want to convert your traditional IRA into a Roth IRA. However, you may need professional assistance to figure out whether it is worth the time and cost. Although contributions to a Roth are not tax deductible for anyone, you can take all or part of your money out after 5 years and age 59 ½ on a tax-free basis.
With a Roth IRA, there are no complicated record-keeping or minimum withdrawal formulas, as required by traditional IRAs. In addition, unlike regular IRAs, you are not required to start taking money out after age 70 ½ or at any time.
If you want to turn an existing IRA into a Roth IRA, you will first have to pay taxes on the money withdrawn from the old IRA. If your contributions were tax deductible, you will pay taxes on the entire amount. If you made a non-deductible contribution, you will be taxed on the gains (interest, dividends and capital gains) over and above your total deposits.
MAKING THE ROTH IRA CONVERSION DECISION
While every case is different, you should consider converting from a traditional into a Roth IRA if the following apply:
- You are still years away from retirement
If you plan to start withdrawing money within the next five years, the conversion may not be worth the hassle or up-front costs.
- You have enough money outside your IRA to pay the taxes
If you dip into your IRA to pay the taxes, you will wipe out some of the gains you would get by converting.
- Tax brackets may increase
Persons who expect to be in the same income tax bracket or a higher one when they retire will benefit most from the conversion. With an existing IRA, you will be taxed at your ordinary income tax rate whenever you withdraw the money.
- You expect the Roth IRA to benefit a younger beneficiary
Because distributions remain tax free and may be spread over the beneficiary’s lifetime many years of tax free investment growth may be realized.
Source: Tax Facts 2010, National Underwriter Company
For more information on the benefits of a Roth IRA contact Tom Fischer, Roth IRA Specialist.