Roth Conversions - Sometimes a Very Good Idea
Many of us have Roth IRA funds that we will access once we reach age 59.5, and have had the funds in the Roth for at least five years. The two great features of the Roth, as noted in another article on this blog, are that when we take Roth money out, it is tax-free! Even the earnings! And secondly, there are no required minimum distributions (RMDs) like there are with a Traditional IRA. At age 70.5, one must start taking money out of a Traditional IRA, yet with a Roth, there are no RMDs. Why care about that? Well, if you want to pass your IRA onto an heir tax-free while avoiding probate (with a designated beneficiary), this is a good way to do it. But what about if we have Traditional IRAs? How can we get that money without taxation?
A Traditional IRA can be converted to a Roth IRA in some cases, depending on income levels. If you are single or married filing jointly and your adjusted gross income (AGI) is less than $100,000, the IRS says you may convert your IRA to a Roth. However, note that if you do convert your Traditional IRA to a Roth IRA, you will be taxed on the amount you converted. This is the reason you won't be taxed at withdrawal; you've already paid taxes on this money. If your AGI is more than $100,000, the IRS says you cannot convert. However, and this is a notable however, the tax laws change in 2010 to allow a person with any income level to convert their IRA to a Roth.
This brings up a good point. What if I want a Roth when I retire, yet my AGI is above the limits for Roth contributions? Well, one might consider putting money into a Traditional IRA (even if the contributions aren't tax deductible), then convert in 2010 and later (if the laws allow), thereby getting the money tax-free AND not having to take RMDs, ever. In other words, if you want to avoid required distributions at 70.5 for a Traditional IRA, put money into a Roth and never withdraw it if you don't need to. That way, you are passing tax-free money onto your heirs without suffering any penalties in the meantime.
Talk to your financial professional to see if a Roth conversion, or a Traditional IRA, would be a good fit for you.
In your corner, Tina Anders
