Ira Comparison

Roth IRA Conversion | Is It Right For Me?

Roth IRAs have brought a completely new and revitalized game plan to financial planning. These IRA accounts came out in 1997 and they offered a new way to look at how you save and how liquidd your investments could be. But…what if you already have a traditional IRA- can you make a Roth IRA conversion? Many traditional IRA accounts do not allow you to touch the funds, or if they do it is under nearly life- threatening circumstances. Let’s take a closer look at Roth IRA conversions and whether you have the option or not! What is your adjusted gross income limitation (AGI)? Your gross income has a lot to do with IRA conversion because federal laws do not permit those grossing over $100,000 per year to make the conversion. This applies for couples as well. If you, plus any one else playing a supporting role in your family, makes over this gross income limitation, you will most likely be turned down with your conversion request. A lot of people try and beat the heat, so to speak, and file separate tax forms. Consult your accountant on this one because the AGI limitations will not allow for conversions by married couples who file separately. The gross income limitation is a very tough rule to bend and it can be very sticky trying to get around it. All of this can be good, not great, news if you are making less then $100,000 per year because now you have much more flexibility in managing your finances. However, there are a few more important notes about converting from a traditional IRA to a Roth IRA. How does conversion affect tax issues? Many people love traditional IRA accounts because they come with so many ‘tax free’ options. You lose most of these when you convert to a Roth account and when you transfer the funds you will most likely have to pay an income tax at your normal rate. Depending on your personal situation you may be taxed on the entire amount of the IRA account or you just may be taxed on a certain percentage of it. Usually when you make an early withdrawal from an IRA account you get stiffed with a 10% penalty fee. However, because you are merely switching IRA accounts to suit your needs, it is looked at as a ‘qualified’ transfer which helps you avoid the high fee. However, you cannot just simply move your funds to a Roth IRA and take them out immediately because then you will get hit with early withdrawal fees from the Roth account. Usually you will have to keep the money untouched for three months. Making a Roth IRA conversion could be the right move for you if you are looking for more freedom with your finances and just a better way to plan for your future. While it isn’t the easiest switch, it is possible!