Q: Should I roll over $30,000 in my traditional IRA account into a ROTH IRA? I am 50 years old.
A: Although the earnings in both types of retirement accounts grow tax-deferred, for longer-term financial planning, I like the benefits of the ROTH IRA over the Traditional IRA.
Additionally, recent changes governing IRAs make it more financially advantageous to do a rollover in 2010.
Lastly, since you are 50 years old and mentioned having other types of investments (bonds, CDs, retirement accounts, etc), I would seriously explore converting your Traditional IRA into a ROTH IRA.
Read on for more details about why a ROTH is likely your better option.
Two major advantages of the ROTH are more control over your withdrawals and a potentially bigger nest egg at retirement.
As you know, with a Traditional IRA, your contributions may be tax deductible up front (depending on your income and marital status), but you must later pay taxes on distributions.
With a ROTH IRA, you get no upfront deduction for contributions. However, your stand to get a bigger payoff on the backend – since distributions made from your ROTH IRA won’t be subjected to income taxes in retirement.
This combination of tax-free growth and tax free distributions makes the ROTH IRA an especially powerful retirement account. Plus, with the ROTH IRA, you get to make contributions at any age and there’s no mandatory withdrawal age.
By comparison, if you have earned income, you can only put money into a traditional IRA up until the year you turn 70 ½, and you must begin taking distributions from Traditional IRAs beginning at age 70 ½.
In 2010, IRA contribution limits for both traditional and ROTH IRAs are $5,000, plus an additional $1,000 for those 50 an older.
Starting in 2010, to be eligible to contribute to a ROTH IRA, your modified adjusted gross income must be less than $177,000 for married taxpayers filing joint returns, and less than $120,000 for single taxpayers.
Also noteworthy is that as of 2010, several important changes have occurred impacting Individual Retirement Accounts.
First, you no longer have to worry about whether you’re eligible to convert a Traditional IRA to a ROTH IRA due to your income level or your tax-filing status.
That’s because previous rules that restricted conversions/rollovers based on income limits and filing status requirements were eliminated effective 2010.
More importantly, the financial sting of doing a rollover has been greatly reduced.
In years past, a rollover was considered taxable income in the year you did the rollover.
However, for any 2010 rollover from a Traditional IRA to a ROTH IRA, any amounts that would be included as income can be spaced out over two years: in equal parts in 2011 and 2012.
This would effectively knock in half any tax bill generated by doing a rollover. The law also still gives you the option of including the entire amount in income in 2010.
But most people doing rollovers will want the benefit of spreading that conversion income over two years and deferring taxes in the process.