Converting to a Roth IRA

Thinking of converting your IRA? Make sure to carefully review the details and benefits that traditional and Roth IRAs each offer. Here's a quick summary of the differences:

 Traditional IRARoth IRA
Tax-deductible contributionsYes 1No
Tax-deferred growth of earningsYesYes
Tax-free growth of earningsNoYes 2
Tax-free withdrawals of principalMaybeYes
Contributions after age 70 ½NoYes
Required minimum distributions after age 70 ½YesNo
What You Should Know Before You Convert

When you have a traditional IRA and you make deductible contributions, you pay taxes upon the entire amount you withdraw later. If the contributions you make to a traditional IRA are non-deductible, you pay taxes only on the earnings withdrawn. With a Roth IRA, your contributions have already been taxed (at your current tax bracket), so qualified withdrawals are tax-free. To convert your traditional, rollover or SEP-IRA into a Roth IRA keep in mind:

  • The AGI limit was permanently lifted in 2010.
  • If you make a contribution to a Roth or convert a traditional IRA to a Roth, you can re-characterize the Roth contribution as a traditional IRA contribution or reverse the conversion to Roth (subject to limitations).
  • You will have to pay taxes on the converted funds. It may make sense to convert if you can easily afford to pay the taxes on the conversion from non-IRA assets.
Next Steps
  • Speak to your financial advisor about whether converting your IRA makes financial sense         

1 Contributions may be fully or partially deductible, depending on your or your spouse's participation in an employer's retirement plan and your income level.

2 Distributions of earnings are tax-free if the Roth IRA has been open for at least five years and distributions are taken for one of the following circumstances: attainment of age 59½, death, disability or a first-time home purchase (subject to a lifetime limitation of $10,000).

This material is provided for general and educational purposes only, and is not intended to provide legal, tax or investment advice, or for use to avoid penalties that may be imposed under U.S. federal tax laws. Contact your attorney or other advisor regarding your specific legal, investment or tax situation.

WEBC 10.25.06/05    11.30.06

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