Roth IRA Conversion - Pros And Cons

Since January 2, 2010, conversions made to Roth IRA are no longer limited by how much you earn yearly. That is why financial professionals are advising their customers to convert their Traditional IRA accounts into Roth IRA. Still, this choice might not be right one for everyone as there are several factors to consider. You should do some research before making this type of decisions, as they are very important and will determine what happens with your retirement funds, and you should always explore the pros and cons of doing a Roth IRA conversion before proceeding with the process.

Traditional IRAs allow individuals to contribute with pre-tax money to their retirement accounts. The money is then invested in stocks and mutual funds in order to grow and obtain the maximum profit. The distributions are then taxed when you wish to withdraw the money from the account. Roth IRAs on the other hand offer individuals the possibility of contributing with after tax money. This way, when withdrawing the money from the retirement account, there will be no taxes and no fees. Since January 2010, any individual can change his IRA account, from Traditional IRA to Roth IRA, without having to worry about his or her income. This conversion has a lot of pros but also some cons that you should consider if you are thinking of converting your IRA account.

First of all, the distributions are tax-free and there is no required minimum distribution, meaning that there is no requirement to withdraw any of you retirement funds during your lifetime. You decide when and why you want to withdraw the money. Taxpayers who expect to be in a higher tax bracket when retiring will benefit more from the Roth IRA and will be able to save a lot of money over a long period of time. This also benefits those who wish to keep their money in a retirement fund for a longer period of time, as they can grow due to smart investments. Also, the Roth IRA provides your heirs with an income tax-free legacy, in case you die. This is very important for those who think about what happens to their family after their death.

There are also the cons of a Roth conversion that you should keep in mind. If you are expecting to be in a lower tax bracket near retirement, the tax benefit you gain through a Roth IRA will be reduced. Also, if you don't expect to live very long, this conversion might not be the best decision as Roth conversion comes with a tax cost, and you won't be able to make up for he money you spend when converting your IRA account.

There are some taxpayers who benefit more from a Roth conversion than others, such as wealthy taxpayers or taxpayers who are seeking to reduce their estate settlement costs and even young taxpayers who have high incomes. All in all, you should consider in which tax bracket you will be near retirement in order to make sure you are taking a good decision.


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Casey Trillbar is the editor of YourRothIRAGuide.com, which is a website
aimed at supplying articles, information and resources to people
considering the use of a Roth IRA Agreement for their retirement.

http://www.YourRothIRAGuide.com