YOU ASK:

Why should I convert traditional IRA to Roth IRA?

WE ANSWER:

It all comes down to your personal age, tax situation and financial objectives. Are you now in a lower tax bracket than you expect to be after you retire? If so, converting to a Roth IRA is a good solution for you. However, if you are currently paying high taxes, it might be worth sticking to your traditional IRA.

To Convert or not to Convert?

  • Roth IRAs give retirement savers the opportunity to pay no income tax on investment earnings throughout their lifetimes. Although you pay income tax on your contributions, none of the distributions from a Roth IRA will be subject to income tax if you follow the rules.
  • While under a traditional IRA, individuals have to start receiving tax distributions and hence, paying income tax after age 70.5, there is no such restriction under a Roth IRA.
  • Roth IRAs provide effective estate-planning: if you pass your Roth IRA to your heirs, they would not have to pay tax unless they do early withdrawals. This can guarantee both you and your heirs tax-free lifetime income.
  • If you convert an existing traditional IRA account into a Roth IRA, you start paying income tax on the converted amount and from that moment on, the account is tax-free.
  • One major drawback has been that individuals with incomes higher than $100,000 have not been able to convert their traditional IRAs to Roth IRAs. However, as of 2010, this restriction will be lifted and Roth IRAs will be opened up to everybody. The new law also allows IRA owners to put off paying tax on the amounts converted or spread your taxes you owe over the following tax years - 2011 and 2012.
  • Although, as of 2010, there will be no income restrictions for conversion to Roth IRA, there is always the possibility that federal income tax rates will rise. However, if tax rates remain the same, you can lock in the low rates, which will prevent you from owing higher taxes in later years.
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