Roth IRA Conversions
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Roth IRA Conversions

Qualified distributions from Roth IRAs are tax free

A withdrawal from a Roth IRA (including both contributions and investment earnings) is completely tax free (and penalty free) if made at least 5 years after you first establish any Roth IRA, and if one of the following applies:

-    You have reached age 59 ½ at the time of the withdrawal
-    The withdrawal was made due to qualifying disability
-    The withdrawal was made to pay for first-time homebuyer expenses ($10,000 lifetime limit)
-    The withdrawal is made by your beneficiary or estate after your death

Tip: The 5-year holding period begins on January 1 of the tax year for which you made your first contributions to any Roth IRA.  Each taxpayer has only one 5-year holding period for this purpose.

If these conditions aren’t met your distribution is “nonqualified,” and only the portion of a Roth IRA withdrawal that represents investment earnings will be subject to federal income tax (and potential 10% early distribution penalty unless an exception applies).  The portion of a Roth IRA withdrawal that represents your contributions (including amounts converted to or rolled over from a traditional IRA) is never taxable, since those dollars were already taxed.  Roth IRA withdrawals are treated as coming from your nontaxable contributions first and from investment earnings last.  

A conversion can be used to overcome the income limit on annual Roth IRA contributions

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 have to pay tax now on the funds that you convert or roll over

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.  

You can’t convert or roll over Required Minimum Distributions into a Roth IRA

After age 70 1/2, you are required to begin taking annual minimum withdrawals from your traditional IRAs (RMDs).  You cannot roll over or convert these RMD amounts to a Roth IRA.

 

Prepared by Broadridge Investor Communication Solutions, Inc.  Copyright 2013.

Securities offered through Securities America Inc., Member FINRA/SIPC and advisory services offered through Securities America Advisors, Inc.  Armstrong Advisory Group, WRKO 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.