Should You Convert Your IRA to a Roth Account?

If you are currently investing money in an Individual Retirement Account (IRA), you may be considering having the money rolled over to a Roth IRA. 2010 is the first a traditional IRA can be converted to Roth IRA without income limit. But before you make any changes, you should be clear about the details of such a move.

How to open an IRA account

How do Roth IRA’s Differ from Traditional IRA’s?

Roth IRAs differ from traditional IRAs in several ways. You don’t get a tax deduction for making a contribution to a Roth IRA, but those contributions grow without taxes and you don’t have to pay any tax upon withdrawal in retirement. You also are not obligated to begin withdrawals from your Roth IRA at age 70½. An added incentive is that the IRS is allowing taxpayers a one-time opportunity to spread out the payment of taxes for a Roth conversion in 2010 over the years 2011 and 2012.

Considerations for a Roth IRA Conversion

Before you rush to convert to a Roth, first be aware of possible drawbacks and tax traps:

The income rather than the tax is split on a 2010 conversion. While the income limitations for Roth conversions are repealed for 2010 and all subsequent years, 2010 is the only year that will allow taxpayers a special break when it comes to paying the conversion taxes.

According to the law, taxpayers who convert in 2010 will not be obligated to include any conversion income on their 2010 tax return. Instead, they will include half the income from the conversion on their 2011 return and half the income on their 2012 return. You may be evenly splitting the income over two years, but that doesn’t mean you evenly split the tax too. In fact, chances are that won’t happen. Your tax bill will depend on a combination of factors like tax rates and overall income.

Mistakes connected to 60-day rollovers. The best way to move money from an IRA to a Roth IRA is through a direct rollover, by trustee-to-trustee transfer. However, this type of transfer is not offered by some company plans or IRA custodians. Which means that they will give you, the account owner, a check. Be aware that in that case you have 60 days to deposit the money in another qualifying retirement account, including a Roth IRA. If you fail to do so, the funds become taxable and aren’t eligible for rollover.

Get the most of your money with these High-Yield Savings Accounts:

Possible increase in Medicare costs and Social Security taxation. Another consideration is that if you do a Roth IRA conversion, you might have to pay higher Medicare premiums or have your Social Security payments taxed.

Tax experts note that Social Security benefits are excluded from the gross income of a taxpayer and are not taxed. But depending on the size of a person’s income, anywhere from 50% to 85% of their Social Security income will be included in gross income. This will lead to a higher tax bill for that year.

Be aware that Medicare Part B premiums are based on income. For the year 2010, joint taxpayers will be placed at the lowest premium levels on the condition that they have income of $170,000 or less ($85,000 for single filings). From that point up, premiums increase. By converting a large IRA or plan balance, you may end up in a higher premium bracket which could potentially cost a couple about $6,000 extra in Medicare premiums for 2010.

Possible loss of financial aid. When considering a student’s eligibility for financial aid, most colleges exclude a parent’s retirement assets. But that rule does not apply to income which a Roth conversion generates. A Roth conversion causes a rise in income for the year or years where the income is included. This may be a one-time aberration but it can still cause a loss of financial aid at a time when you really need it.

New Roth accounts necessitate the preparation of new beneficiary forms. When dealing with IRAs and Roth IRAs, beneficiary forms are the most important estate-planning document. This type of form controls who ultimately gets the money in the account upon your demise. But FYI, each new account you open will necessitate the completion and submission of new beneficiary forms.

This is a guest post from Gary Barzel, Manager of Business development at FastupFront, and senior editor of the FastUpFront Small Business Blog.

This article was originally written or modified on . If you enjoyed reading this post, please consider subscribing to my full RSS feed. Or you can also choose to have free daily updates delivered right to your inbox.


Author Info

This article is contributed by a guest author. If you a blogger or a freelance writer and would also like to contribute a guest article, please use the above Contact form to submit article ideas and drafts for review.

4 Responses to “Should You Convert Your IRA to a Roth Account?”

  1. JoeTaxpayer |  Dec 06, 2010 at 9:54 am

    Few speak of the downside of the Roth conversion. It’s right for some, not everyone. My sig links to an article I wrote some time ago talking about the effect of IRA withdrawals (or any income) when it starts to impact taxability of social security. Think you’re converting at 15%? Not so fast. You may have just entered the phantom tax zone.

    • Tara |  May 12, 2011 at 7:49 am

      Tremendous concepts on this web site. It’s rare these days to find websites with data you are seeking. I’m happy I chanced on this webpage. I will certainly bookmark it or even register for your rss feeds simply to be updated on your new posts. Maintain up the nice job and I’m sure some other folks researching valued information will actually stop by and benefit from your site for resources.

  2. Albert |  Jul 20, 2011 at 11:06 pm

    In general I don’t understand why more Americans don’t start saving money for there IRA when they get a job right out of school. I personally started saving money when i was 20. Now I am 35 and I have amassed a nice chink of change. Any IRA’s best friend is time and you can never get that back. Thanks for your post! I didn’t know some of the differences you pointed out.

    And why does this blog keep saying i am spammy! I read the article and and speaking about IRA’s. I was lucky to have had the knowledge to save early. It was kinda difficult but i lived without the money going into my IRA. Im happy about it though and want to have a good life in retirement.

  3. Albert Cash |  Jul 20, 2011 at 11:07 pm

    In general I don’t understand why more Americans don’t start saving money for there IRA when they get a job right out of school. Annoying!!! I personally started saving money when i was 20. Now I am 35 and I have amassed a nice chink of change. Any IRA’s best friend is time and you can never get that back. Thanks for your post! I didn’t know some of the differences you pointed

    N more dupe content out.

    And why does this blog keep saying i am spammy! I read the article and and speaking about IRA’s. I was lucky to have had the knowledge to save early. It was kinda difficult but i lived without the money going into my IRA. Im happy about it though and want to have a good life in retirement.