Roth IRAs offer benefits you don’t get with other retirement plans. The good news is you may be able to perform a Roth IRA conversion from another plan to take advantage of the benefits Roth accounts provide. This article covers conversions as well as the deadline for Roth IRA conversions.
How is a Roth IRA different from the much more common traditional IRA?
Traditional IRAs are tax deferred, allowing most people to take a tax deduction, depending on eligibility, when a contribution is made. When you reach retirement, distributions from the traditional IRA are included in ordinary income at that time. If you are eligible to make a contribution to a Roth IRA (check with your CPA or tax advisor to find out), you do not get a tax deduction for that contribution. However, this means the distributions in retirement are tax-free and not included in your income. Essentially, with a Roth IRA you pay taxes on the seed (contribution), but the plant (or growth) is tax-free.
If you are ineligible to make a contribution to a Roth account, you are not precluded from taking advantage of the benefits of a Roth IRA. If you have funds in a traditional IRA or similar account (SIMPLE, SEP, 401(k)), you can move the funds in those accounts to a Roth IRA through a conversion. A conversion to a Roth IRA is a taxable event, which generates a 1099R form that is sent to the IRS the year the conversion is made. It is important to note that the taxes cannot be paid by the retirement account. A conversion is taxed to you personally as ordinary income in the year the conversion is made. However, moving forward, the account grows tax-free! But you must perform this transaction before the deadline for Roth IRA conversions.
Deadline for Roth IRA Conversions
Is a Roth IRA better than a traditional IRA? Will paying taxes now be better than paying them later? Should I convert the entire amount in my traditional IRA to a Roth IRA? All of these questions have different answers depending on your current income, your current tax bracket/rate, your expected tax bracket/rate in retirement, and how close to retirement you are. You should seek the advice of your CPA or tax advisor to find out if a conversion is right for you. Don’t wait until tax season to visit your CPA, though. The deadline to convert funds to a Roth IRA is December 31st. Many people don’t see their CPA until January or February and by then, it is too late perform a Roth conversion for the previous year.
If you would like to learn more about the advantages and disadvantages of converting your retirement funds to a Roth IRA, join us for one of our many upcoming events on this subject.
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