Estate Planning Articles

Should You Convert to a Roth IRA?

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 this income restriction has been eliminated, so everyone is now eligible to convert to a Roth IRA.

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 you convert; it will be included in that year's income. But when you consider the benefits below it may be worth it.

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 So there is no income tax or penalty until all contributions have been withdrawn from the account.
Money can be withdrawn at any time without penalty for college expenses, and up to $10,000 can be withdrawn tax-free at any time to buy or rebuild a home.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 expectance 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. 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 $5,000 per year. If you are age 50 and older, the maximum you can contribute is $6,000 per year.

Income Limits in 2011: If you are a single or head of household taxpayer with up to $107,000 adjusted gross income, you can contribute the maximum amount. (Smaller contributions are allowed if your AGI is $107,000 to $122,000). If you are married, filing jointly or a qualifying widow(er) with up to $169,000 AGI, you can contribute the maximum amount. (Smaller contributions are allowed if your AGI is $169,000 to $179,000.)

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.