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Convert Traditional IRA into Roth IRA

Posted by Admin Posted on May 27 2016

A Roth conversion is treated as a taxable liquidation of your traditional IRA followed by a nondeductible contribution to the new Roth IRA. While the tax hit from converting is unwelcome, it may be a relatively small price to pay for future tax savings. After the conversion, all the income and gains that accumulate in your Roth IRA, and all withdrawals, will be totally free of any federal income taxes—assuming you meet the rules for tax-free withdrawals. In contrast, future withdrawals from a traditional IRA could be hit with tax rates that may be higher than today’s rates.

Of course, conversion is not a no-brainer. You have to be satisfied that paying the up-front conversion tax bill makes sense in your circumstances. In particular, converting a big account all at once could push you into higher 2015 tax brackets, which would not be good a good thing. You must also make assumptions about future tax rates, how long you will leave the account untouched, the rate of return earned on your Roth IRA investments, and so forth. If the Roth conversion idea intrigues you, please contact us for a full analysis of the relevant variables.