Roth IRA Conversion Overview
September 14, 2009 by Jean Keener, CFP, CRPC, CFDS
Through 2009, converting an IRA from a traditional IRA to Roth is only available for those with household incomes under $100,000. Beginning next year, that changes. However, a lot of people aren’t aware of the upcoming changes — according to Financial Planning magazine, only 42% of advisor clients were aware of the new Roth IRA conversion opportunity. I will be doing a series of blog posts over the next couple of weeks giving you the details on this opportunity and some examples of who should consider this strategy. Of course, everyone’s situation is unique and these posts are for informational purposes only, so you should only make the decision after consulting with your own financial advisor.
First, why would you want to convert?
Funds withdrawn from a traditional IRA are subject to regular income tax. Funds withdrawn from a Roth IRA (both contributions and earnings) after age 59 1/2 and after you’ve owned the IRA for 5 years are federal income tax-free. By converting from a traditional to Roth IRA, you are paying taxes sooner rather than later on your IRA balance. This strategy allows your post-conversion earnings to avoid taxation altogether and to have potential tax savings on the contributions if your tax rate goes is higher in the future. It also gives you greater flexibility on when you use the funds because Roth IRAs do not have required minimum distributions. For some people, using this strategy can create a larger pool of after-tax retirement income and help with estate planning.
If you’d rather watch a video than read about the Roth IRA changes, this video comes from a service I subscribe to and provides a good overview of the conversion opportunity. Let me know what you think!
Roth IRA Conversion Video
[...] IRA conversions creates a sizable opportunity to reduce estate taxes. We’ve already discussed Roth IRA conversion basics, and who might want to convert. But if your estate is potentially subject to the estate tax at [...]
[...] Roth IRA 2010 conversions – It’s worth looking ahead to 2010 when special rules will apply to Roth conversions. These rule changes might influence your actions now by planning to defer deductions to offset future taxes or by making non-deductible traditional IRA contributions now in anticipation of converting them later. Click here to read my blog post on 2010 Roth conversions. [...]