Roth IRA Conversion Rules
Roth’s Offer A Tax-free Advantage
If you want to have non-taxed income when you retire, then a conversion to a Roth IRA is a great financial investment for you to consider. You can rollover the funds from a 401K or a traditional IRA and gain distinct advantages by converting to a Roth account.
The Roth IRA is a Preferred Account
A Roth account is preferred by many over a traditional individual retirement account as one is given more flexibility as far as their investment choices. With a traditional account, you must make distribution six months after you turn 70. Also, when you’re eligible to withdraw your money, you must pay taxes on it as well. Therefore, many people prefer a Roth account because they can take their money out after they turn 59 ½ without paying any tax as they’ve already paid taxes on their contributions.
Roth Distribution can be made at Any Time
Whether you want to make distribution at 70 or 80, it doesn’t matter. You’re free to choose with a Roth IRA. As stated, once you make distribution, you don’t have to worry about being taxed on the income you withdraw as you are with a traditional account.
Roth IRA Tax Considerations
So what are the conversion rules? Let’s look at the tax considerations first. If you’re converting funds from a traditional individual retirement account, you will have to pay taxes on the amount that is converted into the Roth account. Of course, since the amount of the tax is prepaid, you won’t need to worry about taxation ever again with respect to this particular conversion. In addition, any income that is derived from that amount will not be taxed as well.
Roth Conversion Rules for 2010
Currently, or as of this writing (in 2009), a couple living in the same household or a single person is required to make $100,000 per year or less if they want to convert to a Roth account. That restriction though will be lifted in 2010. Also, beginning in 2010 you can convert half of your amount from a traditional account, 401K or any other retirement plan into a Roth account for the next two years respectively. Therefore you can claim half of your conversion for 2011 and the remainder in 2012. The tax rate then will be applied for each of the two years. This rule applies to the any conversions made in 2010.
For those 59 ½ years old and older . . .
Once you establish your Roth Account, if you’re over 59 ½ (the required age for distribution), you can’t take any money out of your account for five years.
Financial Considerations
Of course, to determine if a Roth conversion is for you, several considerations should be made with respect to your financial resources. Such considerations include your ability to pay the tax, your tax bracket, whether you anticipate on being in a higher income bracket on retirement as well as future tax rates.
Get a Clear Picture
Talk to a financial advisor. You both can review your portfolio and see how a Roth can best benefit you. Make sure you fully understand the Roth IRA conversion rules. That way you’ll get a clearer picture on how to proceed with your retirement planning.