Pros Cons Of Ira To Roth Ira Conversions  

Since January 2, 2010, the earnings test requirement on conversion from traditional IRA to Roth IRA accounts has been eliminated. Although this has made conversions possible for people of all income levels, it is important to assess whether the IRA to Roth-IRA change is beneficial for you or not.

Following are the important pros and cons of such conversions:

Pros of Roth IRA Conversion:

  • Once you convert your traditional IRA contribution to a qualified Roth account, you will become entitled to a tax-free distribution. As Roth IRA investment represents a hedge against any tax rate fluctuations in future, it is never subjected to the income taxes imposed by the federal government.
  • Roth accounts also do not call for any ‘Required Minimum Distribution’ (RMD). That is, after IRA conversion, the investor need not withdraw funds at any particular time, like in case of traditional IRAs, which require the individual to begin distributions at age of 70.5 years.
  • IRA to Roth IRA conversions also lead to significant decrease in the taxable proportion of Social Security benefits.
  • The amount that has been converted from traditional form to a Roth is not subject to any sort of early withdrawal penalty.
  • It leads to a lot of tax savings and is especially beneficial for those who are expecting to fall in the high tax bracket upon retirement.
  • IRA conversions can be accomplished at lower tax costs if the value of the investor’s traditional IRA contribution was lost in the recent past.
  • These conversions are also advantageous for taxpayers with a long-term horizon as they need not withdraw from their changed accounts at a particular time.
  • ‘IRA to Roth IRA’ conversions offer the legacy of tax-free distributions to your beneficiaries or heirs.
  • 50 percent of the tax on amounts converted in the year 2010 can be paid in 2011, while the remaining 50 percent can be paid in 2012.

Cons of IRA Conversion:

  • Tax benefits derived from Roth conversion may get reduced for you if you are likely to be included in a low tax bracket upon retirement.
  • Similarly, the benefits are greatly reduced if the investor is not expected to live long.
  • ‘IRA to Roth IRA’ Conversions bear a certain tax cost, which must be from the cash available, but not from the existing IRA account. Any early withdrawal from Roth IRA, even to pay the tax on conversion, is subjected to a 10 percent penalty, if the individual is less than 59.5 years of age.

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Pros Cons Of Ira To Roth Ira Conversions




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