ANSWERS: 1
  • An Individual Retirement Account (IRA) is a personal retirement account that you set up and manage independent of your employer. The types of IRAs offer slightly different tax benefits, which may make it beneficial for some people to convert their IRA to a different type.

    Facts

    Traditional IRAs, SIMPLE IRAs and SEP IRAs are all tax-deferred accounts, meaning you get a tax deduction when you contribute, but you must include distributions as taxable income. Roth IRAs do not offer a tax break for contributions but let you withdraw the money, including earnings, tax free at retirement.

    Purpose

    For people who expect to be in a higher tax bracket at retirement, the tax benefits offered by a Roth IRA are generally more advantageous so you may choose to convert your traditional IRA to a Roth IRA.

    Considerations

    When you convert money that you have claimed as a tax deduction for from traditional IRA to a Roth IRA, you must include that amount in your taxable income for the year.

    Significance

    Starting in 2010, everyone will be able to convert money from a traditional IRA to a Roth IRA regardless of your adjusted gross income. Before 2010, you could only convert if your adjusted gross income was less than $100,000.

    Warning

    In addition to waiting until you are 59 1/2 to take contributions, a Roth IRA must have been open for five years. If you are opening a Roth IRA for the first time when you make the conversion, you will have to wait five years before taking distributions from the account even if you will be 59 1/2 years old sooner than that.

    Source:

    IRS: Publication 590; Individual Retirement Arrangements

    Motley Fool: All About IRAs: The Roth IRA Part II: Conversions

    Investopedia: The Simple Tax Math of Roth Conversions; Rich White

Copyright 2023, Wired Ivy, LLC

Answerbag | Terms of Service | Privacy Policy