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Should
You Convert to a Roth?
Since the
Roth IRA was introduced in 1998, the prospect of tax-free earnings has lured
millions of investors into converting their traditional IRAs to Roth IRAs. Today
nearly 13 million people own Roth IRAs, and that number is growing.1,2
If
you are considering making the switch to a Roth IRA, here are some things you
may want to know.
 | Contributions to
traditional IRAs may be tax deductible and accumulate tax deferred until
funds are withdrawn, usually during retirement.3
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| Contributions to Roth
IRAs are made with after-tax dollars, but qualified withdrawals (usually
during retirement) are free of federal tax.4
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| When you convert a
traditional IRA to a Roth IRA, you must pay income taxes on the amount
converted (in the year converted). In addition, if you are under age 59½,
any funds withdrawn from the account to pay taxes will likely be subject to
an additional 10 percent federal income tax penalty.
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| A Roth IRA must be in
place for at least five tax years before qualified withdrawals become tax
exempt.
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| If you expect to be in
a higher tax bracket during retirement, converting to a Roth IRA before you
retire may help reduce your overall tax burden.
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| There are no mandatory
withdrawals from Roth IRAs, so if you’d like to preserve more of it for
your heirs, a Roth conversion may be wise.
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Although there are
distinct advantages to tax-free earnings, Roth IRAs are not for everyone. Your
financial outlook and investment goals will help determine whether a conversion
may be right for you.
1, 2) Investment Company
Institute, 2002
3) Distributions from traditional IRAs are taxed as ordinary income and, if
taken prior to reaching age 59½, may be subject to an additional 10 percent
federal income tax penalty.
4) To qualify for the 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). Depending on state law, Roth IRA
distributions may be subject to state taxes.
©
2003 Emerald Publications
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