Roth IRA Conversions...Know What You Are Doing!
It seems the air is filled with buzz on Roth IRAs again. Interest in Roth IRA conversions has heated up with the recently liberalized rules. Millions of taxpayers who were previously ineligible to convert a traditional IRA to a Roth are now able to do so.
You can convert your regular IRA to a Roth IRA if (a) your modified adjusted gross income is $100,000 or less, and (b) you're single or file jointly with your spouse. Beginning in 2010, these limitations disappear. Of course you have to pay the tax in the year of the conversion, but for many people the long-term savings outweigh the conversion tax.
Advantages
There are two other significant advantages to the Roth IRA.
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One is that the minimum distribution rules don't apply. If you're able to live on other resources after retirement, you don't have to draw on your Roth IRA at age 70½. That means your earnings continue to grow tax-free.
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The other big advantage is the ability to take certain early distributions without paying the early distribution penalty. Roth IRAs makes it easier to keep your money working at interest… and also easier to take your money out.
Distributions
Distributions from Roth IRAs are tax-free until you've withdrawn all your regular contributions. After that you'll withdraw your conversion contributions, if any. When you've withdrawn all your contributions (regular and conversion), any subsequent withdrawals come from earnings. Withdrawals of earnings are tax-free if you're over age 59½ and at least five years have expired since you established your Roth IRA. Otherwise (with limited exceptions) they're taxable and potentially subject to the early withdrawal penalty.
Mistakes
The good news is that most Americans can do Roth Conversions. The bad news is that many will make mistakes on those conversions. Among the many are:
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Assuming you will be in a greater tax bracket in the future and you are not.
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Doing a conversion in a year for which the account owner has to take a required minimum distribution, or RMD, before taking that distribution.
So be careful. Consult a Financial Services Professional.
Here’s Helpful “Product Neutral Information
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Abdul Muhammad posted on Saturday, April 03, 2010
Tags: , IRA, Roth, Retirement, Taxes
Posted in: Site News
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