Roth Ira Conversion

A Roth IRA is a type of Individual Retirement Account in the United States. It has many great advantages over a traditional IRA. One of the reasons for switching over to a Roth IRA are that contributions are tax-free and can be withdrawn at any time.

Transactions made within a Roth IRA are also tax-free and do not incur a tax-liability. Also, if you expect to move into a higher tax bracket, all money that is deposited into the Roth IRA will be taxed at your current rate. When the money is withdrawn from the Roth IRA, the money will not be taxed at the higher rate in the future.

Unlike a traditional IRA, a Roth IRA does not require you to be a certain age before beginning to withdraw money. All other retirement IRAs require withdrawals from the account to begin after the owner reaches the age of 70 1/2. Another advantage is that distributions from a Roth IRA do not count towards the income threshold for receiving Social Security benefits, unlike some other IRA's.

Money passed on to your beneficiaries is also tax-free, allowing you to pass on your wealth to generations after you without being taxed. Direct contributions to a Roth IRA can be withdrawn at any time with no fee or penalty, as they have already been taxed. Two Roth IRA's can be combined into one if the owner of one of the accounts dies, and the beneficiary is the spouse who also has a Roth IRA.

However, there are some disadvantages to a Roth IRA when compared to other retirement accounts. One of them is that you do not get a tax deduction as you do with a Traditional IRA for your contributions to the account. Another big disadvantage is that there are income limits for the eligibility to contribute to the Roth IRA.

If you expect to be in a lower tax bracket when you retire, the tax benefits of a Roth IRA are reduced. This is because you will have to pay income tax on the conversion at the higher tax rate. In this case, a traditional IRA may be better as you will pay taxes at the lower tax rate on withdrawals. In addition, changes to the tax laws by Congress may null some of the benefits of a Roth IRA.