Converting a traditional IRA or 401(k) to a Roth IRA
Starting in 2010, it is possible to convert all or a portion of your IRA (including SEP and SIMPLE IRAs) to a Roth IRA. Even a 401 (k) plan from your former employer may be eligible for conversion to a Roth IRA.
If you convert, you’ll have to pay taxes on the taxable portion of the conversion up-front, but in exchange, you may eliminate all future taxes on the principal and earnings in your ROTH.
The 10% IRS early distribution penalty tax does not apply to the amount you convert to a Roth IRA, however, you’ll owe taxes —on the taxable portion of the conversion. The taxable portion generally consists of any IRA contributions and IRA’s earnings that have not yet been taxed.
For 2010 Roth conversions only - the taxable conversion amount will automatically be divided equally between 2011 and 2012. For conversions in 2011 and beyond, the taxable conversion amount will be taxed at the year of conversion.
You may be able to withdraw money entirely tax-free if the Roth IRA has been funded for five or more years and you are over age 59˝, dead, disabled, or making a first-time home purchase (up to $10,000). If you take money out before then, earnings will be taxable and, before age 59˝, may be subject to an additional 10% penalty tax. Also, amounts you contribute to a Roth IRA (including converted amounts that you have already paid taxes on) may be withdrawn tax-free at any time.
Estate Tax Advantage with Roth IRA
While both IRAs are subject to estate taxes, the beneficiaries of Roth IRAs will not have to pay income taxes on their Roth IRA distributions. That is not the case with other retirement monies received by beneficiaries. Therefore, if you are looking for a tax-advantaged way to accumulate assets for heirs a Roth IRA may be a better alternative.
Please consult a qualified tax advisor to learn how a conversion to a ROTH IRA may affect you specifically. |
