Whether an investor benefits from converting assets within a traditional IRA to a Roth account may depend on the amount of time he or she plans to leave the assets invested, estate planning strategies, and his or her willingness to pay the federal income tax bill that a conversion is likely to trigger.
Should you convert all or a portion of your traditional IRA assets to a Roth account? The answer may depend on the amount of time you plan to leave the assets invested, your estate planning strategies, and your willingness to pay the federal income tax bill that a conversion is likely to trigger.
Two Types of IRAs
Each type of IRA has its own specific rules and potential benefits. These differences are summarized below.
Maximum Annual Contribution
Traditional IRA: The lesser of 100% of earned income or $5,500 for single taxpayers and $11,000 for couples filing jointly for 2016. An additional $1,000 "catch up" contribution is permitted for each investor aged 50 and older who has already made the maximum annual contribution.
Roth IRA: Same as traditional IRA
Income Thresholds for Annual Contributions
Traditional IRA: None, as long as the account holder has taxable compensation and is younger than age 70½ by the end of the year.
Roth IRA: Single taxpayers with MAGI in excess of $132,000 and married couples filing jointly with MAGI in excess of $194,000 are not eligible in 2016. Income thresholds are indexed annually.
Deductibility of Contribution
Traditional IRA: Yes, if account holder meets requirements established by IRS.
Roth IRA: No. Contributions are made with after-tax dollars.
Contributions After Age 70½
Traditional IRA: No contributions allowed after age 70½.
Roth IRA: Contributions allowed after age 70½ if owner has earned income.
Required Minimum Distributions (RMDs) After Age 70½
Traditional IRA: Lifetime RMDs are required.
Roth IRA: Not required during the original IRA owner's lifetime.
Taxes on Distributions
Traditional IRA: Distributions are taxed as ordinary income to the extent taxable. Withdrawals before age 59½ may also be subject to a 10% additional federal tax.1
Roth IRA: Qualified distributions are tax free. Withdrawals from accounts held less than five years and before age 59½ may be subject to taxes and a 10% additional federal tax.1
Conversion: Potential Benefits ...
Potential benefits of converting from a traditional IRA to a Roth IRA include:
Which Is Right for You?
If you have a traditional IRA and are considering converting to a Roth IRA, here are a few factors to consider:
There is no easy answer to the question "Should I convert my traditional IRA assets to a Roth IRA?" As with any major financial consideration, careful consultation with a financial professional is a good idea before you make your choice.
1IRA account holders (both traditional and Roth) may avoid the 10% additional federal tax on withdrawals before age 59½ only if they meet specific criteria established by the IRS. See Publication 590-A for more information.
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