IRA Or 401K Conversion to Roth IRA – Is It Right For You?


When it gets to be time for a person’s retirement, he or she would certainly be glad to have tax free income coming in every month. The problem is that with practically every kind of retirement account, these withdrawals will be taxable each time that a disbursement is made. This is not the case with a Roth IRA, which is a good reason why the conversion of an IRA or 401K to a Roth IRA turn out to be a sensible idea.

Overview of the Roth IRA

A new Roth IRA permits people to make as much as $5,000 a year in contributions to these types of accounts. When they are aged fifty or higher, they are permitted to increase the contributions to $6,000 per year. Those single people who earn in excess of $120,000 in a year are not allowed to make a contribution. Married individuals filing jointly also have to earn less than $176,000 in a year in order to be able to contribute. Assuming that a reader’s income levels are below these limits, then Roth IRA’s in place of traditional IRA’s or 401K’s make a lot of sense.

Benefits of the Roth IRA

The biggest advantage to a Roth IRA was hinted at earlier. This is that contributions made after taxes are not taxable while they are being accumulated or when they are being paid out. This allows for a literally tax free income during retirement, something that is impossible with a traditional 401K or IRA. People who are especially interested in such a tax free retirement income should seriously consider converting to a Roth IRA.

Changes in Rules of Converting to a Roth IRA

Because tax free retirement is a sensible concept for many individuals, this proves to be a smart choice for a great number of people. Before 2010, individuals were only able to perform conversions over to Roth IRA’s if they had a less than $100,000 modified adjusted gross income. The 2010 new tax laws lifted this restriction to permit any person who wishes to convert his or her traditional form of IRA over to a Roth IRA. This signifies that for the first time in American history, those who earn larger amounts of money are able to benefit from this improvement in the tax code. Because qualifying for new Roth IRA’s still carry some income limitations, performing a Roth IRA conversion rather than opening up a new one provides advantages.

Important Information on Conversions to Roth IRA’s

If a person is thinking to convert the traditional IRA or 401K over to a Roth IRA, he or she should be aware of a few things. First, there is only a sixty day time frame where the opportunity is allowed. Funds can be withdrawn from the traditional IRA or 401K and then deposited into the Roth IRA. These conversions are considered to be rollovers. When they are accomplished in sixty days from the start of the procedure or less, then there is no standard ten percent penalty. Secondly, if one chooses to take some of the money out of the traditional IRA or 401K and then not deposit it into the Roth IRA, then those funds will be treated as regular income, subject to both taxes and the ten percent penalty.

It is also worth noting that doing such a conversion to a Roth IRA is allowable for a variety of other kinds of retirement plans. Among these are not only 401k’s and traditional IRA’s, but also stock bonus plans, profit sharing, qualified pension plans from employers, 403B plans, 457 plans, and even annuities. All of these can now be converted over to the Roth IRA in the same way that 401K’s and traditional IRA’s can be.

The thing to remember for anyone considering such a conversion is this. Whatever an individual’s income level is, if he or she would like to have tax free income at retirement, these conversions make sense. Conversions of standard retirement accounts into Roth IRA’s are the only means of permitting such a tax free retirement for all individuals.

This post was written by

jason – who has written posts on Budget Clowns.
Father of three and married to a lovely women. Always looking for ways to save money, and invest it properly for my children's future.

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