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Roth IRA Conversion and a Few Things to Consider

In 2006, a change made to the tax laws allowed IRAs to be converted to a Roth IRA but not all taxpayers had that opportunity. Under the 1997 tax law single tax filers and married joint tax filers with an adjusted income of 100,000 or more we're not eligible for an IRA conversion.

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Beginning in 2010, all tax payers can convert their IRAs to a Roth IRA. Funds converted to a Roth IRA via Roth IRA conversion will become income declared the next tax year. If you are a tax filer with an adjusted income of $100,000 or more you can spread the tax due over the next two years to help make the tax payments less biting. One thing to keep in mind when making a Roth IRA conversion is if you spread the taxes over years 2011 and 2012, you will most likely be paying a higher tax rate in 2011 and 2012. You will have to crunch the numbers and decide if paying the taxes over two years or paying them all in one shot is economically beneficial. If a Roth IRA conversion involves a large sum of money, paying the taxes over two years may be your best bet. Holding on to more of your money for a longer time frame may generate more than enough to pay taxes over 2 years. This is where a financial wizard with exceptional money crunching skills will come in handy to look at comparisons. This is a task well worth the effort when considering a Roth IRA conversion.

To make a Roth IRA conversion from a non Roth IRA means following the rules and regulations of the Roth IRA. Upon conversion, you will be required to pay federal taxes on any pre tax dollars contributed and any growth in the investment that was not previously taxed. You will also have to follow the income limitations as well. If you are already over the income limit for a Roth IRA, you are out of luck with a Roth IRA conversion. But always remember; when you undertake a Roth IRA conversion and pay the necessary taxes at the time of conversion, no other taxes are due when it is time to extract funds.

When considering a Roth IRA Conversion, many financial experts advise a conversion is right only if you can pay the necessary taxes from funds other than the IRA itself. This way you are maximizing your IRA and not undermining it by taking out substantial funds. Depending on your age, you may never replenish the funds used for tax payments. You will be reducing your retirement integrity and that is counterproductive to the intent of the IRA.

If you are considering a Roth IRA conversion, the amount converted does not count toward your yearly contribution. Right now, the yearly maximum contribution is $5,000. A Roth IRA conversion will not effect that contribution.

If you have a non deductible IRA it is eligible for a Roth IRA conversion and since taxes have already paid, the conversion will not cost you a penny. However, you have to segregate your non deductible IRAs from other IRAs. That way there is no question about what taxes are being paid on certain chunks of money.

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Posted in Financial Services Post Date 08/14/2018


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