Ira to Roth IRA?
Dear Mr. Priest: I turn 70.5 this year and have a sizable IRA. I am considering converting my IRA to a Roth IRA to avoid having to make my required minimum distributions and also to take advantage of the tax-free growth available with the Roth. I’ve looked into it quite extensively but I’m wondering if there are any hidden snags that I may run into in converting.
Jerry – Frisco
Dear Jerry: If you have looked into converting as extensively as you say you have, you already know that the tax advantages associated with converting a Traditional IRA to a Roth IRA diminish the older you are.
The reason for this is because upon withdrawal, the growth on the Roth IRA can be taken out tax-free, whereas the growth on a Traditional IRA is taxed at your normal income tax rate.
Therefore, the younger you are at conversion, the longer you have for the growth to accumulate and the more tax-free dollars will be available with the Roth IRA.
Consult my Web site for a calculator to help you determine the advantages of converting.
As far as other things to look out for in your situation when converting, the most overlooked aspect that I see has to do with qualifying for the conversion and how this relates to your minimum required distributions (MRDs).
Most people don’t realize that your MRDs on your Traditional IRA count toward your modified adjusted gross income (MAGI).
This can present a problem since in order to qualify to convert your Traditional IRA to a Roth IRA, your MAGI must be under $100,000.
It is possible that your MRDs could push you over the $100,000 threshold. Therefore, in the past if you were going to convert and if you had a sizable IRA, it was best to convert prior to 70.5 when your required minimum distributions were scheduled to begin.
In your case, since you are turning 70.5 this year, you would have had to convert last year to prevent your MRDs from counting in the year you convert. If you convert this year, unfortunately they will count toward your MAGI.
Fortunately, after 2004 this problem goes away. Starting in the year 2005, MRDs don’t count in determining eligibility for converting a Traditional IRA to a Roth IRA. Therefore, depending on your situation it may be best to wait. Happy planning!
Bob Priest, MBA, CFP, is an independent certified financial planner and registered investment adviser serving clients locally and nationally. He can be reached at (877) BOB PRIEST or on his Web site at http://www.BobPriestFinancial.com. All opinions herein are those of the author and not of the Summit Daily News or its staff. Submit your financial questions to Bob@FinancialCompanies.com.
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