New Roth IRA Conversion

Do you have a traditional individual retirement account (IRA)? If you do, then you should be aware that starting next year, you may convert all or part of your IRA into a Roth IRA no matter how much you earn. Up until now, only those with adjusted gross incomes of $100,000 or less could do so.

With a traditional IRA, you don't pay taxes until you withdraw from your account. Currently, you can not make any further contributions to your account during or after the year you turn 70 ½ years old, and at that time you must start taking required minimum distributions. (There are certain reasons you can make withdrawals without penalty; always check with a financial professional before making any changes or withdrawals from any type of retirement account.)

A Roth IRA, on the other hand, is an account with contributions of after-tax dollars. Earnings are not taxed when you make qualified withdrawals. You may continue to contribute as long as you like, and there are no required minimum distributions.

There are several possible advantages to converting to a Roth IRA. First, the principal (the original conversion amount, not the earnings) in the Roth IRA can be withdrawn tax-free at any time; second, the owner of the account will not have to take any minimum distributions in retirement; and third, if the tax rates rise, or you expect to retire in a higher tax bracket, converting now will allow you to pay taxes at a lower rate.

Since you are able to contribute as long as you like, there is the added benefit of leaving a far larger sum to your heirs, in the event that you don't need to rely on your account for sole support during retirement.

To complicate matters, in 2010, investors who opt for the Roth IRA conversion may pay the entire amount of taxes due on the conversion at once, or spread the taxes equally between the years 2011 and 2012. The main reason for opting to convert portions in different years, instead of doing it all at once, is because some investors could see a big jump in taxes in a single year if they are converting a large amount.

Under "resources", at the end of the article, I have included a link to the Morningstar IRA Calculator, a very useful tool for helping you to decide which IRA might work best for you.

This article, and others like it, are simply to give the reader an overview of the two IRA types, and to publicize the new conversion opportunity coming up. They are in no way a substitute for professional financial advice or tax advisors; and you should always do your own homework and familiarize yourself with terms and conditions for all accounts and financial instruments, rather than blindly depending on someone else, even if they are a professional.