How to Convert an IRA to Roth

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How to Convert an IRA to Roth

Are you planning on converting your traditional IRA to a roth IRA? Like any responsible investor, it’s best to know the advantages and disadvantages of having a roth IRA. Here are a few things you have to know.

The Difference between a Traditional and Roth IRA

  • One obvious difference between the two is that while traditional IRA contributions and distributions are taxable, Roth IRAs are not. This is one reason most people want to convert their traditional IRA to a Roth IRA.
  • Another difference is that, some say Roth IRA may be worth higher than a Traditional IRA in the future, given of course that you have qualified distributions, otherwise you might incur tax penalties upon withdrawal of your IRA.
  • While traditional IRAs only lets you make contributions until you’re about 70 years old, Roth IRAs don’t have an age limit.

So how do you convert Traditional IRA to Roth IRA? Here are some steps you can follow.

Know the Qualifications

  1. You can’t just convert your IRA to Roth. There are some guidelines and requirements that you have to meet. Check if you’re eligible for conversion before deciding to do so. Here are some of the income requirements to be able to convert your IRA.
    • If you’re married and have a joint tax return, your income should not be greater than $166,000.
    • If you’re separated and applied for a separate tax return, your earnings should not be more than $10,000 for a tax year.
  2. If you’re any of these 3, your income should be less than $114,000.
    • single
    • head of the family
    • married but is filing tax separately
  3. Unlike a traditional Roth that limits your contribution until you reach the age of 70, Roth IRA contributions doesn’t have an age limit.
  4. To know more about the qualifications for an IRA rollover, it’s best to consult a certified public accountant.

File for a Roth IRA conversion

  1. If you qualified for conversion, fill up all the necessary documents and submit the forms.
  2. If you made a withdrawal on your traditional IRA, make sure to transfer your funds to Roth within 60 days.
  3. You’re still required to pay your taxes upon filing for a tax return. There will be no tax deductions on your withdrawal when you’ve reached your retirement age.
  4. Roth IRA will be greatly beneficial if your income upon retiring is greater than your income now. Remember that there is a direct relationship between your taxes and your income. The higher your income is, the higher your taxes are as well.

Be Informed

The above information are the basic things you have to know if you’re planning on converting your IRA. It’s still best to learn more about your state’s laws and consult a CPA.

  • Know the clause for a qualified distribution to avoid tax penalties.
  • Distributions shouldn’t be made within 5 years upon filing a Roth IRA. This period starts from your first contribution for a tax year. If you contributed for the tax year 2008, even if you filed it April of 2009, your 5-year period will start on 2008.
  • Distributions should be made under any of these conditions:
    • You’re 59 ½ old
    • Disability
    • Purchase of a first home
    • Your distributions are received by your beneficiaries upon your death

Converting a traditional IRA to a Roth IRA may not be applicable to anyone. Consult a CPA to have a better understanding of the qualifications and procedures. Remember to make wise choices for your future.

 

Comments

  1. ira vs roth ira said,

    on August 18th, 2009 at 10:32 pm

    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.