Should I convert my Roth IRA to a Traditional IRA?
Posted on 20. Oct, 2009 by admin in Blog, Retirement Planning
When it comes to talking about IRA’s, one of the big topics of conversation today is whether a client with a traditional IRA should convert to a Roth IRA. In this Financial Strategy of the month we’ll investigate the differences between the two retirement accounts and the option to convert from one type of account to another.
Let’s begin by discussing the basic differences between the two accounts. Contributions to a traditional IRA are tax deductible, while contributions to a Roth IRA are not tax deductible. Roth IRAs require that your income must be below certain levels to qualify to make contributions. Traditional IRAs may not be fully tax deductible if your income is above certain levels.
While either type of retirement account will allow an investor to invest where he or she would like, the tax implications on the growth is dramatically different from the traditional IRA to the Roth IRA. Growth within a traditional IRA occurs on a tax deferred basis, while growth within a Roth IRA occurs on a tax free basis.
Then, at retirement, when funds are withdrawn from the retirement accounts, the differences are even more obvious. Withdrawals at retirement from a traditional retirement account are taxable while qualified withdrawals from a Roth account are completely tax free.
Here’s the interesting part. A client that has a traditional IRA may elect to convert their account from a traditional account status to a Roth account status. In order to convert, in addition to certain criteria being met, a client needs to pay the tax due on the traditional retirement account.
For example, if I’m eligible to convert from a traditional IRA to a Roth IRA, and my current traditional IRA account balance is $100,000, I’m required to pay tax on the entire $100,000 traditional IRA account balance.
However, once I pay that tax, the retirement account is converted from a traditional account to a Roth account, meaning that all future growth on the account is tax free rather than tax deferred, provided I follow all the rules relating to maintaining a Roth IRA.
A Roth IRA conversion can be a great alternative for many traditional IRA account holders. To learn more, attend one of our upcoming informational seminars or come to our office for a Roth conversion analysis. Please contact our offices for more information.
Special Note: With Traditional IRAs early withdrawals may be subject to a surrender charge. In addition, distributions prior to age 59 ½ may be subject to a 10% tax penalty.
Investment advisory services offered through Absolute Return Solutions, a Registered Investment Advisor.
