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To Convert or Not to Convert Your IRA? (#1000-378)

As the debate over the value of Roth individual retirement accounts (IRAs) versus traditional IRAs continues, I thought it might be helpful to outline a few of the pros and cons of converting from a traditional to a Roth IRA.

Pros:

A Roth IRA will grow tax free instead of tax deferred.
There are no income taxes on any retirement distributions, as long as the distribution is qualified.
There are no required minimum distributions at age 70 1/2.

Cons:

You must pay income taxes on amounts rolled over if they would be taxable when withdrawn.
The income taxes must be paid in the year of the conversion.
IRA conversion may put you into a higher tax bracket or cause you to lose some tax credits, deductions, or exemptions.
If the income tax is paid by withholding funds from the converted IRA, the amount withdrawn will be subject to income tax and the 10% federal penalty if you’re under the age of 59 1/2.

To convert a traditional IRA to a Roth IRA, you or you and your spouse must have an adjusted gross income of less than $100,000 in the year of conversion. As a general rule, the longer you have until retirement, the more sense a conversion to a Roth IRA makes.

If you have any questions or would like to discuss the possibility of converting your IRAs, please give me a call.

What Is a Roth IRA? (#0100-331)

How much do you know about the Roth individual retirement account (IRA)? Here are a few facts you should know:

Individuals can invest up to $2,000 per year ($4,000 for couples), provided the amount invested does not exceed earned income.
Contributions are not tax deductible, so they are made from after-tax dollars.
Contributions can be withdrawn free of taxes and penalties at any age.
Earnings can be withdrawn tax free after age 59 1/2, provided the account is held at least five tax years.
Penalty tax-free withdrawal of earnings before age 59 1/2may be permitted in cases of death, disability, or to pay qualified higher-education expenses.
Mandatory distributions are not required at age 70 1/2or over.
Contributions can be made by single taxpayers with adjusted gross income (AGI) less than $95,000 and married taxpayers filing jointly with AGI less than $150,000. Contributions are phased out for single taxpayers with AGI between $95,000 and $110,000 and for married taxpayers with AGI between $150,000 and $160,000.
You can still contribute to a Roth IRA after age 70 1/2, provided you have earned income and your AGI is not above the phase-out range.
Conversions from a traditional IRA to a Roth IRA are permitted for taxpayers with AGI of no more than $100,000 in the year of the conversion.

If you think a Roth IRA may be a good retirement savings tool for you, but would like more information, please give me a call.