In 1997, the Roth IRA was introduced. Since then, many people have converted all or a portion of their existing traditional IRAs to a Roth IRAs, where interest earned may be completely tax-free. This benefit applies as, once a taxpayer has held the account for five years, no taxes will be owed when the money is withdrawn at retirement. This is the opposite of a traditional IRA where a tax break is received in the present, but income taxes are paid in retirement.
In the past, to be able to convert from a Traditional to a Roth IRA, a taxpayer’s income had to be below $100,000. But the rules have changed and there is no longer an income cap in place. Now, most high income earners can convert their IRAs provided they pay the appropriate conversion tax. If the funds are moved within sixty days, there is no 10% early withdrawal penalty, usually applicable to taxpayers under the age of 59 1/2. Converting a traditional IRA to a Roth means taxes will have to be paid on contributions previously deducted, as well as on the account’s earnings.
Taxpayers that expect their income tax rate to be higher in retirement, or at the time when they plan to withdraw their money, may want to consider a Roth IRA conversion. If taxable income is lower this year than in a typical year, or if some accounts have decreased in value, a Roth IRA conversion may be a wise move because a taxpayer may be subject to lower tax rates. Also, since there are no minimum required distributions (MRDs) from a Roth IRA during the lifetime of the original owner, it may make sense to consider converting to a Roth IRA now.
Another option is to transfer money through partial conversions of a traditional IRA. Any amount, $100, $500, or $10,000 may be converted over time. If done entirely in one year, a taxpayer might be pushed into a higher tax bracket and face a higher tax liability. If done in stages over a period of years, this can be avoided.
Some individuals have traditional IRA accounts which contain both deductible and nondeductible contributions. How much of this money will be taxable upon conversion? An experienced and knowledgeable tax professional can help make this determination, which may require tracking and ascertaining the taxability of contributions over long periods of time.
If you have any questions about converting a traditional IRA to a Roth IRA, call THE TAX EXPERTS at the Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation call 212-490-0704.
