Converting or Rolling Over Traditional IRAs to Roth IRAs
In general, you can transfer all or a portion of your traditional IRA funds to a Roth IRA. This can be accomplished in one of two ways: you can convert your traditional IRA to a Roth IRA, or you can roll over funds from your traditional IRA to a Roth IRA.
- Roth IRAs are not subject to the lifetime Required Minimum Distribution (RMD) rules. Federal law required you to take annual minimum withdrawals (RMDs) from your traditional IRAs beginning no later than April 1 of the year following the year in which you reach age 70 ½. These withdrawals are calculated to dispose of all of the money in the traditional IRA over a given period of time. Because Roth IRAs are not subject to the lifetime RMD rules, you are not required to make any withdrawals from your Roth IRAs during your life. This can be a significant advantage in terms of your estate planning and may be a good reason to consider converting the funds.
- Annual Roth contributions may be limited, or eliminated, depending on your income and filing status. If your ability to make annual Roth contributions is restricted because of these limits, and you want to make annual Roth contributions, a conversion may be the answer. You can simply make your annual contribution first to a traditional IRA, and then take advantage of the new liberal conversion rules and convert that traditional IRA to a Roth IRA. There are no limits to the number of Roth conversions you can make.
- Special penalty provisions may apply to withdrawals from Roth IRAs that contain funds converted from traditional IRAs. If you’re under age 59 ½ and take a nonqualified distribution from a Roth IRA, the 10 percent premature distribution tax generally applies only to that portion of the distribution that represents investment earnings. However, if you convert or roll over funds from a traditional IRA to a Roth IRA and then take a premature distribution from that Roth IRA within five years, the 10 percent premature distribution tax will apply to the entire amount of the distribution (to the extent that the distribution consists of funds that were taxed at the time of conversion).
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2012.
Securities offered through Securities America Inc., Member FINRA/SIPC and advisory services offered through Securities America Advisors, Inc. Armstrong Advisory Group and the Securities America companies are unaffiliated. Representatives of Securities America, Inc. do not provide legal or tax advice. Please consult with a local attorney or tax advisor who is familiar with the particular laws of your state.
When you convert or roll over funds from a traditional IRA to a Roth IRA, the funds that you transfer are subject to federal income tax (to the extent that those funds represent investment earnings and tax-deductible contributions made to the traditional IRA). Even if it makes overall financial sense to convert funds from a traditional IRA to a Roth IRA, paying tax on your IRA funds now may not be desirable.
Securities offered through Securities America, Inc. Member FINRA / SIPC. Advisory Services offered through Securities America Advisors, Inc., an SEC Registered Investment Adviser. Armstrong Advisory Group and the Securities America companies are unaffiliated.
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