Roth IRA Conversions: For All Income Levels
The Roth IRA is not just for middle-income Americans anymore. Originally established as an attractive retirement savings vehicle for this group of wage earners, the…
The Roth IRA is not just for middle-income Americans anymore. Originally established as an attractive retirement savings vehicle for this group of wage earners, the Roth IRA had been out of reach to high-income earners until several years ago.
As of 2010, investors of any income can convert retirement plans and Traditional IRAs to Roth IRAs. This means that even high-income wage earners will benefit from the tax-free withdrawal benefits the Roth IRA conversion offers.
There is ample reason to consider a Roth conversion and to discuss this notion with your own tax advisor. Roth IRAs present certain advantages to eligible investors. The Roth affords eligible investors tax-free withdrawals, tax-free growth, no minimum distri-bution requirements and estate planning benefits.
So now that anyone can convert, does it make sense to convert pre-tax retirement plans to a Roth IRA? Depending on your situation, it might.
Investors converting to Roth IRAs pay income tax on the money for the year of conversion essentially locking in todays historically low tax rates for the benefit of potentially tax-free distributions in the future. This can help you create a pool of tax-free assets, which might provide flexibility in managing your taxes in retirement.
If youre considering a Roth IRA conversion, there are several items you should discuss with your tax advisor. For example, do you have assets outside of the IRA to pay the taxes that will be due? It rarely makes sense to withdraw assets from the IRA to cover that payment.
Also, how long will it be before youll need to use the money? Each Roth conversion has a five-year waiting period in addition to having to be age 59-1/2 before the earnings are eligible for tax-free withdrawals.
It is important to understand what these changes mean in your own financial situation: while the conversion from a traditional to a Roth IRA is open to anyone regardless of income or filing status, making new contributions to a Roth IRA continue to be capped by income.
The income threshold for a full contribution for 2012 is $110,000 for single persons and $173,000 for married persons filing jointly. For 2013, those figures jump to $112,000 and $178,000, respectively.
Unlike a traditional IRA that requires withdrawals beginning at age 70-1/2, funds may grow tax-deferred in the Roth IRA indefinitely or be withdrawn on your own schedule.
Another attraction of the Roth conversion for affluent investors is that it can reduce the size of ones taxable estate. The account can be kept intact and passed on to your heirs income tax-free.
Whether or not you decide a Roth IRA is the right retirement account for you, its always smart to plan ahead and save money for the future. There are many factors to think through before you convert an IRA to a Roth IRA or invest in a Roth. You should consult with your Financial Advisor to evaluate this and other investment options suitable for your financial situation.
This article was written by Wells Fargo Advisors and provided courtesy of Terry R. Campbell and Susan Paolo, Financial Advisors in Chardon at 440-286-2553.
Investments in securities and insurance products are: NOT FDIC-INSURED / NOT BANK-GUARANTEED / MAY LOSE VALUE
Wells Fargo Advisors, LLC, Member SIPC, is a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company.
