IRA to Roth Conversions – Why You Should Do Them and the Benefits

When it comes to saving for your retirement, there are a few things you should know about an IRA and a Roth IRA so that you can make an informed decision. Here is a little on both types of IRAs and taking advantage of an IRA to Roth conversion – why you should do them and the benefits.

Traditional IRA

A traditional IRA is one that may allow the ability to make pre-tax deductions and is best for those who are when ready to make withdrawals, expect to be in the same tax bracket or a lower tax bracket.

Roth IRA

A Roth IRA is one that allows you to make after tax contributions and is best suited for someone who thinks they will be in a higher tax bracket when taking out withdrawals. The best thing is that any money that you withdraw in retirement does not go to Uncle Sam but rather stays in your own pocket. This makes it like a bonus for the future.

Basically, a Roth IRA offers withdrawals free from taxes along with growth that is tax free as well. As long as you have had the account for five years or more, and you are above the age of 59 1/2 or older, you won’t owe any federal taxes by withdrawing your money when you want to.

There are other benefits to having a Roth IRA like:

Beneficiaries have withdrawals that are tax free when you pass along your Roth IRA.
A regular IRA has a cutoff age of 70 1/2 but with a Roth IRA, there is no age limit. If you have the right income, you can continue to put money into your account for as long as you want.
There are no required minimum distributions (RMDs) and that is for as long as you live.
There are also no employer plan restrictions. The annual maximum amount in 2015 was $5500 and $6K for those older than 50. However, even if you have an employer retirement plan like a 401K, you can contribute the annual maximum amount.
Benefits of IRA to Roth Conversions

There are quite a few benefits to taking advantage of a traditional IRA to a Roth conversion.

On your future withdrawals, you eliminate federal income tax.
After you die, your heirs get a bequest free of taxes. While they still have to take RMDs every year, if the account has been in service for at least five years, they will not have to pay federal income tax on the withdrawals.
Being the owner of the IRA, you can watch your money get larger due to the fact that you do not have to take RMDs (required minimum distributions) during your lifetime.
One reason to do the IRA to Roth conversion is if you expect higher taxes in the future. What this does is lock in the lower taxes you have at this point and lessen the amount of taxes over the life of the portfolio.

Within that same vein, if you have uncertain tax rate expectations then at the very least a partial or full Roth conversion is suggested. The tax diversification advantages come from holding different accounts and helps minimize the future tax rates going in a specific direction, which reduces risk to the investor.

One thing to keep in mind is that if your income is too high for a Roth IRA, there is a way around it by getting a regular IRA then go through the back door. What this means it is a conversion of the IRA assets to the Roth because no matter how much income you are making, anyone can convert money from a traditional IRA to a Roth IRA.

If you want to learn more about IRA to Roth conversions or anything else related to IRAs, simply contact us and we will be more than happy to help.

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