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Questions to Ask before Converting to a Roth IRA
For more than 35 years, traditional individual retirement
accounts (IRAs) have provided tax advantages – including
tax deferral and the potential for a tax deduction – to people
saving money for retirement.* Roth IRAs were introduced
in 1998, offering a different set of advantages, including the
potential for tax-free withdrawals. But there were limitations
on who could convert a traditional IRA to a Roth IRA. Now,
that’s changing.
Q: What’s new?
A: Effective Jan. 1, 2010, conversions from a traditional to a
Roth IRA are no longer limited to taxpayers with a modified
adjusted gross income of $100,000 or less, as they were prior
to that date. In addition, married couples who file separately
are no longer prevented from making a conversion. Now
anyone can convert a traditional IRA to a Roth IRA.
Q: What are the tax consequences of converting to a Roth?
A: You owe ordinary income taxes on all or a portion of
the amount converted, depending on whether you made
deductible or nondeductible contributions to the traditional
IRA. Usually, the tax is due when you file a federal income
tax return for that year. But if you make the conversion in
2010, you have two options: 1) include the conversion on
your 2010 tax return or 2) split it equally between your
2011 and 2012 tax returns.
Q: What are some potential advantages of converting a
traditional IRA to a Roth IRA?
A: Distributions from a Roth IRA are tax-free if you’re age 59½
or older and have held the account at least five years.** You are
not required to begin taking minimum distributions at age 70½,
as you are with a traditional IRA. Distributions are not required
during the original account holder’s lifetime (but they are
required for beneficiaries). And if you leave the account to heirs,
your beneficiaries can receive the assets tax-free.
Q: What are some reasons I might not want to make the conversion?
A: Converting may not make sense if you:
- Don’t think you’ll be in the same or a higher tax bracket
in retirement. The taxes you pay on the conversion could
end up being higher than the taxes you’d pay when making
withdrawals from your traditional IRA, if you didn’t
convert it.
- Can’t pay the taxes on the conversion from sources other
than your IRA. If you’re younger than age 59½, you’ll
probably owe a 10% penalty on IRA funds withdrawn to
pay taxes. And in any case, you’ll lose the potential benefit
of tax-free growth on that amount.
- Don’t have a long enough time horizon to allow a Roth’s
tax-free earnings to compensate for the taxes you pay on
the conversion.
With so many factors to consider, deciding whether to
convert a traditional IRA to a Roth IRA is a complex
decision. The investment professionals at St. Mary’s Bank
can help you weigh the pros and cons to arrive at an answer
that’s right for you. Contact Jack Crane, CFP®, Executive
Vice President/Financial Consultant of St. Mary’s Financial
Services, at 603.629.1524 or e-mail jack.crane@uvestmail.com, or vist www.stmarysbank.com to set up an appointment today.
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This publication does not constitute legal, accounting or other professional advice. Although it is intended to be accurate, neither the publisher nor any other party assumes liability for loss or damage due to reliance on this material. Images may be from one or more of these sources: ©Thinkstock, ©iStock, ©Fotolia.
