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Converting Retirement Accounts to Roth IRAs

Converting Retirement Accounts to Roth IRAs

In 2010, income tests were removed which prevented many individuals from converting other retirement accounts to Roth IRAs. Many more people are now eligible to move existing retirement money into Roth IRAs. Key points of this conversion are:

  • Amounts converted are subject to taxes.
  • All future growth on the converted amounts will be tax free provided certain circumstances are met.
  • The money must be in the account at least 5 years.
  • The taxpayer must be at least 59 1/2 at the time of distribution

A taxpayer should “run the numbers” prior to committing to the conversion.

Favorable indicators for making the conversion include:

  • Alternative sources are available to pay the taxes. That is, the amount to be converted is completely invested and taxes are paid from other funds.
  • Longer compounding periods are planned. A 25 year old person will see much greater tax free compounding than a 55 year old person.

The opportunity to make the conversion is exciting but based on assumptions which vary by individual, therefore the wisdom of making the conversion will also vary.

Important assumptions in “running your numbers” are:

  • Time period for compounding
  • Expected Rate of return on investments
  • Estimated tax rates at retirement
  • Availability of funds to pay taxes due on conversion

Should your converted account fall in value, there are opportunities to re-characterize the original conversion.

Planning for retirement is daunting, but “failing to plan is planning to fail” and no one wants to fail in retirement. Take action!