Should You Convert to a Roth IRA?

Moving your money from a normal Individual Retirement Account to a Roth IRA is not a one-minute decision. You need to carefully consider the following facts before deciding if the conversion is worth it. So, should you convert to a Roth IRA? The information below will help.

Paying Taxes

Taxes are applicable on the amount in a Traditional IRA that is converted into a Roth. However, you can still access the money in the Roth tax-free during retirement. This includes all the future earnings that you get in the Roth. Taxes need not be paid for any non-deductible contributions that have been made.

You will incur Roth IRA penalties if you happen to tap into your account to withdraw before you reach the age of 59 ½. These withdrawals are classified as early withdrawals and are subject to a penalty of 10% in addition to the tax on the withdrawal. If you foresee any early withdrawals, it is better to put off conversion until sometime later.

However, there are some IRA withdrawal penalty exceptions that you can take advantage of.

Tax Bracket Analysis

Roth IRA conversions, if made, can help you withdraw the money at a later stage completely tax-free. It is especially beneficial to convert to a Roth if your current income is very low. You will end up paying lower taxes in the future; while, avoiding the higher tax bill that could apply at a later time. Should you convert to a Roth IRA? This is one good reason why you should.

Tax on conversions made in 2012 can be paid over the next two years; however, it is best to pay it in full in 2012 when you file your returns if you expect a lower tax bracket this year than the next two. It will be good to remember that money that is converted gets added to the ‘other’ income for the year; you could get pushed into a higher tax bracket.

See also  Understanding the Minimum Age for a Roth IRA

What if you don’t need the money in retirement?

You may not use all the converted money during your retirement. If you don’t need to tap into the reserves of your Roth IRA, this money can be passed on to your heirs – completely tax free. Roth IRA rules allow your heir to make full use of the money (tax-free) regardless of their top tax bracket, unlike inheriting through traditional IRAs that require tax payments on withdrawals in the top brackets.

Benefits of a Roth IRA

If you go with the best IRA company they can help you with your conversion to a Roth IRA. The tax benefits can be realized to the fullest extent – no tax on the money after the age of 59 ½. You can keep contributing to the Roth IRA and need not make any mandatory withdrawals at 70 ½. The longer the money remains in the account, the more you benefit from tax-free growth.

When should you convert to a Roth IRA?

If you have a child for whom you have to pay college fees, it would be wise to put off the conversion until after at least the junior year in college. Remember, any converted money is considered as taxable income for the present year. This could affect any financial aid you might seek for your child. You could opt for a no fee Roth IRA account in which your fee will be kept to the minimal required.

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