Traditional IRA Conversion to Roth IRA
An individual is eligible to convert a Traditional IRA to a Roth IRA in any tax year his/her/their Modified Adjusted Gross Income level does not exceed the following:
Singe – Less than $100,000
Joint – Less than $100,000 together
Although converting a traditional IRA to a Roth IRA may not be right for all investors, it could make sense if:
- You’re able to leave the money in the account for 5 years or more and until you reach at least age 59 ½.
- You expect your tax rates to rise in the future and would rather pay taxes now.
- You can pay the resulting taxes from a source other than the traditional IRA. This allows the full amount of the traditional IRA to grow in the Roth IRA until it’s withdrawn.
Consequences of Conversion
Converting your traditional IRA to a Roth IRA means that contributions and growth in the traditional IRA that haven’t yet been taxed will be taxed at ordinary income-tax rates. Therefore a Roth IRA conversion could come with a hefty tax bite, depending on your situation.
Reasons to Convert
- You can withdraw money tax free after at least five years and you have reached the age of 59 ½.
- There are no required minimum distributions.
- It can be an effective estate-planning tool.
- A Roth IRA can provide tax diversification.
If converted in the calendar year of 2010, the taxable income amount can be split evenly between their 2011 and 2012 tax returns. They will not have to report any converted income on their 2010 tax return. If converted after 2010, it will be taxable in the year converted.
Before you decide to make a conversion we encourage you to discuss conversion options with your tax consultant and your financial advisor.
