Converting or Rolling Over Traditional IRAs to Roth IRAs

IRA Rollovers

 

Definition

You may decide, after careful review, that the Roth IRA is a better retirement savings vehicle for you than a traditional IRA. If so, you should consider transferring funds from a traditional IRA to a Roth IRA. This can be accomplished by converting a traditional IRA to a Roth IRA, or by rolling over funds from a traditional IRA to a Roth IRA. Either way, the income tax consequences and other results are the same. Assuming you qualify to convert or roll over funds, determining whether you should can be a complicated and difficult decision. You must weigh the benefits against the income tax consequences and other potential drawbacks.

Key Strengths

  • Qualified distributions from the Roth IRA will be completely tax free
  • For nonqualified distributions from the Roth IRA, the portion of the distribution that represents your contributions is not taxable
  • You do not have to take required minimum distributions from the Roth IRA after age 70½
  • If you use non-IRA funds to pay the income tax that results from rolling over or converting funds to a Roth IRA, those funds are removed from both your taxable estate and your countable assets
  • Qualified distributions from Roth IRAs are not counted in determining the taxable portion of your Social Security benefits

Key Tradeoffs

  • Funds that you convert or roll over from a traditional IRA to a Roth IRA are subject to federal income tax, to the extent that such funds represent investment earnings and tax-deductible contributions to the traditional IRA
  • Using IRA funds to pay the resulting income tax (the "conversion tax") has significant drawbacks
  • Special penalty provisions may apply to withdrawals from Roth IRAs that contain funds converted or rolled over from traditional IRAs
  • The taxable income that results from converting funds can increase the taxable portion of your Social Security benefits
  • There always exists the risk of future changes in federal law governing the taxation of Roth IRA distributions

Variations from State to State

  • Some state and local taxing authorities may not follow the federal tax treatment of Roth IRAs
  • Some states currently provide Roth IRA funds with less creditor protection than traditional IRA funds

How Is It Implemented?

  • Contact the custodian/trustee of your traditional IRA; obtain and complete the necessary paperwork to convert your traditional IRA to a Roth IRA, or
  • Establish a Roth IRA and complete the necessary paperwork for a direct transfer of funds from your traditional IRA, or
  • Establish a Roth IRA, withdraw funds from your traditional IRA, and roll those funds over into the newly established Roth IRA within 60 days

 

 

IMPORTANT DISCLOSURES            Investment Advisory Services offered through IRA Solutions, Inc., A Registered Investment Advisor in the State of California. Jesse Lipscomb is an Investment Advisor and Independent Insurance Agent, California Life Insurance Agent License: 0D22050.    Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances.To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

 

 

 
 
 

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