Power is a good thing, especially when it comes to earning. That’s the strength of a Roth IRA. It gives you a powerful way to invest for retirement. Unlike a traditional IRA, contributions are made from after-tax earned income, and your account earnings build tax-free.
New Roth IRA Conversion Opportunities
- The $100,000 income limit for Roth conversions has been permanently repealed beginning January 1, 2010.
- Conversions are permitted for taxpayers who are married, but who file separately.
Why You May Want to Consider a Roth IRA Conversion
Although you will pay taxes on pre-tax assets that you convert to a Roth IRA your money will then grow tax free. Future withdrawals from a Roth IRA are tax-free if they are a "qualified distribution" under IRS rules.
Conversion to a Roth IRA may be appropriate for you if:
- You have enough money outside of your IRA or employer plan to pay the taxes that will be due.
- You expect that you will be in the same or in a higher tax bracket when you retire.
- You will not need access to the assets until a significantly later date.
- You are already saving for retirement with an employer-sponsored plan
- You are willing to give up some features of your employer plan in order to gain IRA features, such as nearly unlimited investment options, and perhaps more flexible beneficiary options.
- You want to eliminate having to take Required Minimum Distributions from these funds during your lifetime.
Leaving assets where they are now; in a traditional IRA or an employer plan may be appropriate if:
- You will need to tap your retirement account to pay the taxes on a conversion.
- You expect to be in a lower tax bracket when you retire.
- You may need the assets in the near future.
- A portion of your employer plan is invested in employer stock.
- You want to keep some of the features of your employer plan, such as creditor protection and other features your plan may provide, such as, no charges for trades in the account and ability to take a loan on the account.
Decided Conversion Wasn't The Best Choice For You?
Regardless of the reason, you have until the 15th of October of the year following the year in which you converted to a Roth IRA to re-characterize back to a traditional IRA. Keep in mind, should you re-characterize your Roth Conversion you will not be allowed a reconversion until the following year. You will also no longer be allowed to spread the income tax from the conversion over two years.
A Roth IRA offers you flexibility. With it, you can choose to invest tax free for as long as you wish and choose to withdraw money or not. You can withdraw your earnings tax-free and penalty-free after five years and after you reach age 59-1/2. Penalty-free withdrawals are allowed for first-home purchase‚ higher education‚ death‚ disability and certain medical and health insurance bills. In most cases, Roth IRAs can be passed along to heirs, letting your loved ones benefit from the tax-free investment growth and distribution of assets, and unlike a traditional IRA, there are no requirements for mandatory withdrawal once you reach age 70-1/2.
A Roth IRA may not be converted or rolled over to other retirement fund investments. Our knowledgeable Financial Services Representatives can help you evaluate any traditional IRAs you have to decide if conversion to a Roth IRA is right for you.
Now might be the best time for you to diversify your retirement program by opening a Roth IRA. When you do, you’ll put the power of growing your money tax free to work for you.
After the 5-year period, a distribution from a Roth IRA will be tax and penalty-free if it is:
- made on or after age 59-1/2
- made on account of death or disability
- used for qualifying first time home buyer expenses
An otherwise eligible distribution won't be qualified if made within the 5-tax-year period beginning with the first tax year for which a contribution was made to the individual's Roth IRA.
For pay outs properly allocable to rollovers from a non-Roth IRA, the 5-year period begins with the tax year in which the rollover contribution was made.
Roth-IRA pay outs that aren't qualified distributions will be taxed and the taxable portion of pre-age-59-1/2 withdrawals will be penalized, subject to the 10% penalty exceptions applicable to premature distributions from non-Roth IRAs.
If a non-qualifying pay out is made, contributions to the Roth-IRA will be recovered tax-free before earnings are taxed.
Distributions from a Roth IRA will not be subject to the required distribution rules of Code Sec. 401(a)(9)(A), or the incidental death benefit rules of Code Sec. 401(a).
Rollovers to a Roth IRA from either a non-Roth IRA or another Roth IRA are allowed only if they are qualified rollover contributions that meet the requirements of the 60-day time period and are not in violation of the "one-year" rollover rules.
A qualified rollover from one Roth IRA to another Roth IRA is tax-free and can be made regardless of the taxpayer's AGI.
Qualified rollovers from a non-Roth IRA to a Roth IRA, or conversions of non-Roth IRAs to Roth IRAs, are treated as taxable distributions and are not subject to the 10% penalty tax on pre-age 59-1/2 distributions. For additional information regarding qualified rollovers, refer to the IRS website.
MEA Financial Services/Paradigm Equities, Inc. does not give tax or legal advice. The comments regarding the law and tax treatment simply reflect our understanding of current interpretations of such laws. Since laws are always subject to interpretation and possible changes, we recommend that you seek the counsel of an attorney, accountant or other qualified tax advisor regarding these matters as it applies to your particular situation.