Convert IRA to Roth IRA

If you want to convert IRA to Roth IRA you will need to know some basic Roth IRA conversion rules as well as the pros and cons of doing it. So, here is a basic Roth IRA conversion summary of what you need to know before you start.

First of all, what are the pros and cons of a Roth IRA to IRA conversion? The main difference between the two plans is when you will pay your taxes. Is it better to pay your taxes now and have a tax free income when you retire, or is it better to postpone paying your taxes until you retire?

This boils down to what will save you the most money. If you believe that taxes will be higher in the future or you will be in a higher tax bracket then a Roth IRA makes sense because you will be able to get your taxes out of the way before the price goes up.

If you believe that your taxes are higher now and will drop after retirement then there is really no point in switching because it will only harm your savings.

Figuring this situation out is the most important aspect to consider when deciding whether to convert IRA to Roth IRA or not. There are some other advantages, for instance you are not forced to withdraw money at age 70 ½ with a Roth IRA like you would be with a Traditional IRA.

But realistically it is all about the taxes. If you have some investments or a business or something that may put you in a higher tax bracket after you retire then a Roth IRA would work much better for you. But if you expect your income to drop after you retire then it doesn’t make much sense to do an IRA conversion to Roth IRA.

Roth IRA Conversion Rules and Taxes

If you plan on converting an IRA to a Roth IRA then you are going to have to pay taxes up front to make up for the taxes you missed earlier. You can either pay all of your taxes now, or you can spread it out over the next two years, but you have to pay them one way or another.

If it is going to bump up your tax rate to convert IRA to Roth IRA then you may want to spread it out over the next two years in order to lower the tax burden. If not and you can afford to pay the taxes then you can just pay it all now and get it over with.

Roth IRA Conversion Without Taxes

Usually when you convert IRA to Roth IRA you must pay taxes on the money. There is one exception to this however; if your contributions to the IRA were originally nondeductible then you can do an IRA conversion to Roth IRA without having to pay taxes on that money.

But you have to keep record of it and be able to prove this.

Getting Started

Before you get started you must contact the company that hosts your IRA and request the paperwork to convert IRA to Roth IRA. When filling everything out there are a few questions you need to know.

• Are there any nondeductible contributions you have made?

• How do you want to convert the assets?

• Will you pay the taxes yourself or do you want to account custodian to withhold money for taxes?

• Who are the beneficiaries of the new account?

• Do you want to pay taxes now or spread them out over a two year period?

• How much do you want to convert? All of your account or just a portion?

If you are sure that an IRA conversion to Roth IRA is right for you and know these questions then contact the company that host your account and fill out the information right away, the sooner the better.

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