Should I Convert My Traditional IRA To a Roth IRA?

How can a Roth IRA Conversion Benefit You?

Previously, if your adjusted gross income was $100,000 or more, you did not qualify to convert your tax-deferred savings to a Roth IRA. But beginning in 2010, the income restriction has been eliminated, so everyone is now eligible for a Roth IRA conversion.

You can roll over amounts from your traditional IRA and from eligible retirement plans, which include qualified pension, profit sharing or stock bonus plans such as 401(k)s; annuity plans, tax-sheltered annuity plans; and deferred compensation plans of a state or local government. You do not have to roll these into a traditional IRA first.

Of course, you will have to pay income taxes on the amount of your Roth IRA conversion.  If you do a conversion the total amount of the conversion will all be included in that year’s income.

BENEFITS OF A ROTH IRA

• Unlike a traditional IRA that requires you to start taking your money out at age 70 ½, with a Roth IRA there are no required minimum distributions during your lifetime.
• Unlike a traditional IRA, you can continue to make contributions to a Roth IRA after you have reached age 70 ½. (See restrictions below.)
• As a general rule, after five years or age 59 ½, whichever is later, all distributions to you and your beneficiaries will be income tax-free. So your money doesn’t grow tax-deferred…it grows tax-free.
• Withdrawals before age 59 ½ are considered contributions first, then earnings. So there is no income tax or penalty until all contributions have been withdrawn from the account.
• Money can be withdrawn at any time without penalty for college expenses, and up to $10,000 can be withdrawn tax-free at any time to buy or rebuild a home.
• You can stretch out a Roth IRA just like a traditional IRA. After you die, distributions will be paid over the actual life expectancy of your beneficiary. Also, your spouse can do a rollover and name a new, younger beneficiary with a longer life expectancy and get the maximum stretch out.

CONVERSION CONSIDERATIONS

This is an excellent opportunity, but make sure you evaluate your situation and run the numbers before you make a decision on your Roth IRA conversion. Consider how much you would pay in income taxes. Are you currently in a low tax bracket? Will your retirement tax bracket be the same or higher than it is now? Can you pay the tax without dipping into your tax-deferred savings? Did you make any non-deductible contributions that won’t be taxed when you convert? Do you want to eliminate your required annual distribution? Should you convert some or all of your tax-deferred savings?

CAN YOU MAKE CONTRIBUTIONS TO A ROTH IRA?

There are still restrictions on who can contribute to a Roth IRA.

Maximum Contribution Limits: If you are under age 50 and meet the income limits below, you can contribute up to $5,500 per year. If you are age 50 and older, the maximum you can contribute is $6,500 per year.

Income Limits in 2016: If you are a single or head of household taxpayer with up to $117,000 adjusted gross income, you can contribute the maximum amount. (Smaller contributions are allowed if your AGI is $117,000 to $132,000). If you are married, filing jointly or a qualifying widow(er) with up to $184,000 AGI, you can contribute the maximum amount. (Smaller contributions are allowed if your AGI is $184,000 to $194,000.)

SEEK EXPERT ADVICE

This is an appropriate time to get advice from a qualified professional who has experience in this area. There may be a substantial amount of money involved, and while you certainly want to take advantage of this opportunity if it applies to you, you also want to make sure you act wisely.