Some additional thoughts on Roth IRA conversions....
With a Roth IRA you get to withdraw your investment and earnings tax-free if you've owned the account for five years and you're 59 1/2. But when you do a Roth IRA conversion, there's a separate five-year clock that applies to "conversion basis amounts. If you are under age 59 1/2 at the time of a Roth IRA conversion, the amount you convert is subject to income taxes, but not the 10% early withdrawal penalty that typically applies to taxable distributions taken prior to age 59 1/2.What the government didn't intend was for you to use the IRA conversion option as a work-around for avoiding the 10% early withdrawal penalty.
To avoid this potential abuse, conversion basis removed from a Roth IRA within five years of conversion is potentially subject to a recuperative 10% penalty assuming you are still under age 591/2 at the time of Roth distribution, a point that often causes confusion.
Traditional IRA owners can do Roth conversions. That group includes individuals with SEP IRAs and SIMPLE IRAs, though you have to watch out for the early distribution penalty from a SIMPLE IRA.
But plan participants in 401(k)s, 403(b)s and 457 plans also can do Roth conversions as long as they are eligible to take a distribution from their plan and the funds are eligible for rollover to an IRA. You should check whether your plan will allow in-service distributions so that those funds can be converted now instead of waiting until you stop working.
Things get really complicated if you have a non-deductible traditional IRA! You have to consider the total value of all your IRAs when converting all or a portion and use a pro-rate rule. So, if by chance you have $100,000 in four IRAs, one of which has $50,000 in after-tax contributions, then Uncle Sam will only tax you on 50% of the amount converted. You can't only convert the non-deductible IRA.
More questions abound on whether you can use some of the IRA funds to pay the tax bill due or whether you should use outside funds, whether you can convert to multiple IRAs or not, etc. Consult with a tax or planning professioal on all of these matters.
Now there’s a talk going on about people converting their IRAs into Roth Individual Retirement Account. Roth Ira is the best for the people who are on the right side of age, because the Roth IRA allows for tax waiver. You can always compare between the pros and cons of a Roth IRA account and a normal IRA account and then decide upon it.
ReplyDelete