IRA Roth

Retirement Planning and retirement plans

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 IRA Roth IRA
Eligibility dependent on earned income levels No Yes
Tax-deductible contributions
Yes 1 No
Tax-deferred growth of earnings Yes Yes
Tax-free growth of earnings No Yes 2
Tax-free withdrawals of principal Maybe Yes
Contributions after age 70 No Yes
Required minimum distributions after age 70 Yes No

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 If the contributions you make to a traditional IRA are non-deductible, you pay taxes only on the earnings withdrawn.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:

* Through 2009 your adjusted gross income (AGI) must not exceed $100,000 and, if married, you must file a joint tax return. The AGI limit is removed 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.

Roth IRA Advantages

Roth IRAs can provide a tax-free source of retirement income. Contributions to a Roth IRA are not deductible, but withdrawals - including any earnings - are generally free from federal income taxes. Roth distributions are tax-free if you begin withdrawals at least five years after establishing the account, and you are at least age 59 at the time of the withdrawal; or you are using the funds for the purchase of a first home or you are disabled or deceased.

Unlike traditional IRAs, Roth IRAs allow you to make contributions after age 70.

There are no minimum required distributions with a Roth IRA. Traditional IRAs require minimum distributions starting on April 1 of the year after you reach 70.

You may contribute up to $4,000 ($8,000 for married couples filing jointly, as long as no more than $4,000 goes into either spouse's IRA annually) or 100 percent of earned income, whichever is less, to a Roth IRA annually. The contribution limit phases out for singles with an AGI of $99,000 to $114,000, and for married couples filing jointly with an AGI of $156,000 to $166,000.

You may convert a traditional IRA to a Roth IRA in any year your AGI doesn't exceed $100,000, provided your tax status is not "married filing separately." However, the amount you convert from a traditional IRA to a Roth IRA is generally considered part of your taxable income for the year of conversion. However, you may incur this penalty if you subsequently withdraw converted funds from the Roth IRA before age 59 and sooner than five years after establishing your Roth IRA. Your financial professional or tax adviser can provide more detailed information on tax-related issues.

You don't have to choose one type of IRA over the other. You may have both a traditional IRA and a Roth IRA, contributing to either or both whenever you wish. Your total annual contribution to all IRAs may not exceed the lesser of $4,000 or 100 percent of earned income.

For more information or to have us answer any questions you may have, please call 1-800-559-2900,

email Atlantic Financial, or contact us See Also: Roth IRA vs. Traditional IRA | Rollover IRA | Roth IRA | SEP IRA | Traditional IRA