IRA convertion to ROTH
I just found this site today after several days of surfing the subject.
I’m retired, over the age of 59 1/2, have had a 401k from the time they were conceived, and upon retiring rolled it over to a traditional IRA. It is now in an anuity doing nothing. The value is 1/2 mil give or take.
What would the benifits and consequences be in converting my IRA to a Roth?
I read this statement on a posting today and it is quite disturbing. Would someone please explain this statement to a layman, who thought that IRAs grew tax deferred? “If she were to leave it as a regular IRA for 30 yrs. She is going to be taxed on all the growth over those 30 yrs.”
Permalink Submitted by Alan Spross on Wed, 2008-07-09 23:20
The statement is correct as long as the IRA is a traditional IRA. Gains in a traditional IRA are tax deferred, meaning the tax is pushed off until distributions are taken, but then the gains and probably most of the original amount will be taxed at full ordinary income tax rates. A Roth IRA in comparison is tax deferred until the Roth becomes qualified and then becomes totally tax free.
A decision to convert is very complex and should only be done if the tax paid will be equal to or preferably less than the tax you expect to pay if you don’t convert in retirement. Converting too much in one year will increase your marginal tax bracket for that year to a rate that may well be higher than your rate through retirement. Therefore, you might want to convert small amounts each year. It is often best to convert prior to starting SS benefits because a conversion will cause more of your benefits to be included in your AGI. You should also have the funds available to pay the taxes from other funds, not out of the conversion. If converting an annuity, the company is required to put a value on the fringe benefits that exceed the cash value upon conversion by more than a minimum amount.