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Should I convert to a Roth IRA?
Eligibility
- Your modified adjusted gross income (MAGI) must be no more than $100,000 for single and joint filers in the year you make the conversion.
- If you are married and file your taxes separately, you are not eligible for a conversion.
Tax treatment
- Taxes are due for the tax year of the conversion.
- If the IRA you own is funded with fully deductible contributions, then the entire amount you wish to convert is taxable.
- If the IRA you own is funded with fully nondeductible contributions, then only the investment earnings of your conversion balance are taxable (because contributions reflect after-tax dollars).
- If you have several IRAs that were funded with a combination of deductible and non-deductible contributions, your conversion balance must be prorated to reflect the various contributions based on IRS withdrawal rules. Be sure to talk to your tax adviser.
- You are not required to convert all your Traditional IRAs at the same time. In fact, you may be able to convert just a portion of your Traditional IRA balance as long as you follow the tax rules for Traditional IRA withdrawals.
While a conversion can be a valuable way to gain the added tax benefits of the Roth IRA, the consequences of the wrong decision can be steep. So, before you take the plunge to convert an existing IRA to a Roth IRA, brush up on the various pros and cons. Make sure you crunch the numbers with your financial advisor.
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I Convert? |
Perhaps No
- Stay With Traditional IRA if:
- Retirement tax bracket likely to decline
- Tax hit on conversion balance can’t be paid out of pocket, without
dipping into retirement account
- Conversion would push you into a higher tax bracket
- You anticipate the need to tap your converted IRA before the account
has been open for five years
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Perhaps Yes
- Convert to Roth IRA if:
- Retirement tax bracket likely to stay same or rise
- Existing IRA was funded with nondeductible (after-tax) contributions
- Can afford to pay current conversion taxes out of pocket, without
tapping the account being converted
- Long investment horizon, allowing for greater tax-free growth
- Roth is likely to give you more money later despite tax hit now
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