Roth IRA:  To convert or not to convert, that is the question

Roth IRA: To convert or not to convert, that is the question


This coming year offers a very promising opportunity for everyone. Now, taxpayers can choose to switch to a Roth IRA from their previous traditional IRA. This can be done in spite of low income levels. Indeed, it is a very good opportunity. Listed below are ways how the system works.

First, let’s find out what a Roth IRA is. Tax purposes do not encompass Roth IRA contributions. You will not be taxed upon withdrawal given that you have met all of the necessary requirements. Distributions at any age are not mandatory. The traditional IRA mandates a person above 70 ½ to start taking distributions. The similarity of Roth IRA and the traditional IRA lies in what happens at death because both will still taxed in your estate. The beneficiary also has similar requirements from the tradition IRA and the Roth.

Let’s take a close look at how the regular IRA is converted to the Roth. You have the liberty of choosing whether to convert all of your regular IRA to Roth or only a portion of it. You don’t have to convert everything to Roth. However, your income will be taxed just like any other income when you convert. If you choose not to convert to Roth, you would still be paying taxes in the form of distributions upon reaching the age of 70 ½ Converting only speeds up the process.

Different options were made by the congress for citizens to pay the necessary taxes. There are two options which you can choose from. First, you can pay the full amount in a single year. The second option is that you will pay the average tax in the next two years. But should you decide to go with the second option, it is important to note that the applicable tax rates will be different in 2015 and 2016. This will have a huge effect on your conversion income. The wiser choice would be to wait for the tax rates for 2015 and 2016 to be published. Here, you can decide which option would benefit you more.

Many people are wondering why there is a need to convert from the traditional to the Roth early. For one, a Roth distribution will be free from tax upon reaching a certain holding period. All of your earnings will be free from tax by this time. Additional growths are also free from tax. The benefit of converting from a tradition IRA to the Roth IRA increases with the increase in growth rate on your retirement account. Lastly, the longer the time you invest your money, the more benefits you will receive.

There is no minimum required distribution for the Roth IRA as compare to a regular IRA. Thus, you don’t have to make distributions by the time you reach 70 ½. This contributes to a tax free growth. This is even more beneficial for those who do not depend on the retirement account. You can decide to let is grow steadily, and before you know it, your money will multiply by several folds.

This year, it is strongly recommended to convert from the regular IRA to the Roth IRA. Put planning and strategizing at the top of your things to do list this coming year. You have the option to ask for assistance to know whether a conversion would actually benefit your financial plans.

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