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Explain When It Is Beneficial to Convert to a Roth IRA

Converting a traditional IRA retirement plan to a Roth IRA plan may be a good choice for some. Converting your traditional IRA into a Roth IRA may be a smart choice for you under the following circumstances: (1) you think your tax bracket will stay the same or go up after you retire, (2) you plan to wait at least five years before withdrawing money, (3) you have sufficient funds from other savings or investments to pay the taxes on the conversion, (4) you won’t move into a higher tax bracket during the year by converting, (5) you want to avoid a required minimum distribution from your retirement savings, and (6) your annual gross income is less than $100,000 (single or married) in 2007.

To convert to a Roth, you in take the money from your traditional IRA , 401(k), 403(b), or 457 plan. You must then pay the taxes on these accounts before you can move the funds to a Roth IRA. For the money to accumulate tax free in the Roth account, both the five-year rule and the fifty-nine–and-a-half rule still apply.

Transfers are allowed in three ways: (1) accept a payment from your traditional IRA and redeposit it within sixty days, (2) request a trustee-to-trustee direct transfer, or (3) change the account designation to a Roth with the account’s trustee. The direct transfer is the simplest and safest way to convert. If you use the sixty-day rollover option, remember that a 10 percent penalty tax will be withheld at distribution, and you will have to replace the withheld taxes with other funds when the money is deposited into the Roth account. Moreover, the 10 percent early withdrawal penalty applies if you use IRA funds to pay income taxes at conversion. Direct transfer is the simplest and safest way to convert funds from one type of account to another.


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