Is A Roth IRA Conversion The Right Move?

With a traditional Individual Retirement Account (IRA), an account owner contributes pre-tax dollars and withdrawals during retirement are then taxable. Conversely, contributions to a Roth IRA are made with after-tax dollars and withdrawals during retirement are tax free when they’re distributed according to IRS rules. (A distribution from a Roth IRA is tax free and penalty free, provided the 5-year aging requirement has been satisfied and one of the following conditions is met: age 59-1/2, disability, qualified first-time home purchase, or death.) A Roth IRA conversion enables an individual to take all or part of an existing traditional IRA and convert it to a Roth IRA. Converting assets held in an IRA to a Roth IRA so that they’re distributed tax-free might sound like a good idea, but investors must keep in mind that the Internal Revenue Service gives no free passes, and this so-called “privilege” comes with a cost – namely paying taxes today in exchange for a potentially lower future tax liability. When converting IRA assets into Roth IRA assets, the owner must pay taxes on the original deducted contributions as well as money earned on the investments in the IRA.

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Source: Wealth Management