Converting to a Roth IRA

Should you switch your Traditional IRA to a Roth IRA? With tax-free accumulation of investment earnings, plus the flexibility to withdraw funds penalty-and tax-free under certain circumstances, a Roth IRA offers attractive benefits. However, not everyone is a good candidate for conversion. The following may help you begin to decide.

Consider converting to a Roth IRA if…

• You can pay the tax due at conversion from a source other than your IRA.
• You expect your tax bracket to remain the same or rise at retirement.
• You want to continue making contributions after age 70 ˝ and may want to pass your IRA assets to your heirs after your death.

How much do you earn?
In order to convert your Traditional IRA to a Roth IRA, your adjusted gross income must be less than $100,000, whether you file a single or a joint federal tax return.

How much is in your IRA?
Any money that you switch from a deductible Traditional IRA to a Roth IRA will be taxed upon conversion (in a nondeductible IRA, only the earnings are taxed). Depending on the size of your account, that could be costly. However, in exchange for paying the tax now, your accounts will grow tax-free for the future.

When will you need your money?
If you will need access to your IRA soon, it probably makes sense to leave your money in your Traditional IRA. The reason? Your assets must remain in a Roth IRA for at least five years in order to avoid tax penalties upon withdrawal.

What tax bracket will you be in at retirement?
If you expect your tax rate to be the same or higher when you retire, converting to a Roth IRA may provide you with more retirement income.

Your money can grow tax-free for a longer period of time with a Roth IRA.
The reason? Roth IRAs are not subject to minimum distributions at age 70 ˝.

The conversion advantage
Deciding whether a conversion is right for you involves weighing the up-front costs against the long-term tax advantages of a Roth IRA. You may want to consult with a tax adviser to help you determine if conversion to a Roth IRA is appropriate for you.

If converting all of your Traditional IRA assets to a Roth IRA presents too large a tax burden, consider converting just a portion of your assets.

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