Come January, a longstanding rule that has prevented many people from enjoying the benefits of Roth IRAs will be lifted. Anyone, regardless of income, will be able to convert a traditional IRA into a Roth, allowing investments to grow tax-free.
This option is worth thinking about now, because you may have to come up with a substantial chunk of cash to pay taxes triggered by the conversion.
It sounds great, but the Roth conversion doesn’t make sense for everyone. Key factors are your age, tax bracket, time before you’ll start IRA withdrawals, and available cash to pay tax on the conversion.
The BankingMyWay.com Roth IRA Conversion Calculator can help you decide whether this move makes sense.
Millions of Americans have traditional IRAs, funded from direct investments or rollovers from 401(k)s and similar workplace retirement plans.
Depending on your income and whether you have a retirement plan at work, your contributions to traditional IRAs may or may not be tax deductible. Once in the account, your money grows on a tax-deferred basis, meaning you pay no tax until it is withdrawn.
Roth IRAs do not provide any tax deduction on contributions, but all withdrawals are tax free. That makes them tremendously attractive to many investors, especially those who do not qualify for deductions on traditional-IRA contributions anyway.
But there’s a catch: Individuals with modified adjusted gross incomes above $120,000, and couples who file joint returns with MAGI more than $176,000 cannot contribute. Also, taxpayers, whether single or married, cannot convert traditional IRAs to Roths if their MAGI exceeds $100,000.
(For details on Roths and a definition of MAGI, see IRS Publication 590.)
This $100,000 limit will be waived for conversions done during 2010.