Should You Convert Your IRA to a Roth IRA?

You’re going to be hearing a lot about Roth IRA accounts in the coming months. The reason is that the federal government is making traditional IRA account owners an offer. The offer is to pay taxes on some or all of your traditional IRA account funds and place them into a Roth IRA account where they can grow tax-free—forever.

Sound enticing? Not so fast. Tax-free income in the future comes with a price. The funds that you convert become taxable and the income taxes owed could bump you into a higher tax bracket, or make your social security income taxable.

You should consider these points before taking action:

>Do you plan to hold the new Roth IRA account for at least 10 years before spending any of the funds?

>Can you afford to pay the taxes owed on the conversion without taking funds from the converted account?

>Do you expect to be in a higher tax bracket in the future?

These are only some of the variables that should be analyzed when deciding to convert your IRA into a Roth IRA.

A few additional facts to know about Roth IRA accounts include:

>Next year, contributions to Roth IRA accounts are limited by the amount of money you make. Conversions will have no income limitations.

>For the remainder of this year, conversions are limited to individuals with incomes less than $100,000.

>Contributions to a Roth IRA are made with after-tax dollars. Contributions to Roth IRA accounts are not deductible on your federal tax return. That’s why you will owe income taxes if you convert your traditional IRA account to a Roth IRA.

>You can withdraw your Roth IRA contributions at any time without any tax or penalty. This includes the funds that you converted from your traditional IRA.

>All money in a Roth IRA grows tax-free. It doesn’t matter if it’s from contributions or conversions.

>Your profits can be withdrawn tax-free after you turn age 59 ½ and have had the funds in the account for at least five years.

While the deal the federal government is offering sounds enticing, careful analysis and understanding of the consequences should be your first priority. You should seek the advice of a professional financial advisor to help you understand your options and their benefits and pitfalls.