Roth IRA Conversion Guidelines
The Roth IRA is a special type of IRA account that accepts after-tax contributions and does not tax withdrawals during retirement. When you have been making contributions to a traditional IRA and wish to transfer your IRA balance to a Roth IRA, you must understand how this is accomplished so that you do not incur any penalties from the IRS.
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Rules
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The rules for converting a traditional IRA to a Roth IRA change from 2009 to 2010. Normally, you may not convert to a Roth IRA if your adjusted gross income is over $100,000. However, in 2010, those rules are suspended. Also, for 2010 only, you may spread out the taxes by paying them over 2011 and 2012 instead of paying them all in the year of the rollover.
Process
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You must get a transfer request form from your Roth IRA custodian. The IRA custodian is the financial institution that holds your money for you. The custodian normally fills out your transfer request for you and sends you the form so that you can sign it. You must sign and return the form to your Roth IRA custodian. Then, the custodian sends the form to your traditional IRA custodian. The traditional IRA custodian then transfers the money to your Roth IRA. Finally, you must record the transaction on your tax return. You must pay income taxes on all of the money you transfer to your Roth IRA.
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Benefit
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The benefit of transferring money to a Roth IRA is that the Roth IRA is not taxed when you make withdrawals from it during retirement. This means that you get the benefit of increased net income when compared to traditional IRA withdrawals assuming all other investment factors remain equal.
Disadvantage
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The disadvantage to converting to a Roth is that you pay income taxes on your conversion amount. The taxes you pay depend on the size of the conversion. The larger your conversion, the more tax you pay. This could negatively affect your future retirement income if you are retiring soon after the conversion.
Considerations
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Consider converting to a Roth if you can make the conversion and still meet your retirement savings goals before retirement. If you convert to a Roth IRA in 2010, then you have two years to pay taxes instead of one year. This may be an ideal time to convert to a Roth IRA if you have an adjusted gross income in excess of $100,000.
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