 In the past, only people with adjusted gross incomes of $100,000 or less were eligible to convert their traditional IRAs to Roth IRAs. The Pension Protection Act of 2006 repealed this rule, but it doesn't take effect until 2010.
In another change starting in 2008, investors can make a direct rollover from an employer–sponsored retirement plan to a Roth IRA, treating it as a Roth conversion (income limits still apply until 2010). Fortunately, you have some time to decide whether a Roth IRA conversion would be an appropriate move for you.
Although a tax–free retirement income might sound too good to pass up, there are some trade-offs and drawbacks when converting a tax–deferred retirement account to a Roth IRA. Here are some factors to consider. A Roth conversion may make sense if you expect to be in a higher tax bracket in retirement, or if you expect tax rates to be higher in the future. Consider this: By the time you are ready to retire, you may have little or no mortgage interest to deduct from your taxes. Your children will likely be grown and no longer your dependents for tax purposes. And you may not be making tax–deductible retirement plan -contributions. Taxes Today A Roth conversion requires that you pay income taxes that have been deferred on qualified retirement plan assets. You can convert the funds all at once or over multiple years. The amount you convert in a given year is included in your gross income when you calculate your taxes. One drawback is that if you use funds from the original retirement account to pay the taxes before you reach age 59½, it would be considered an early distribution and would be subject to a 10% federal income tax penalty. Of course, to qualify for a tax–free and penalty–free withdrawal of earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59½ or due to death, disability, or a first–time home purchase (up to a $10,000 lifetime maximum).
Prepare to Convert
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