Traditional Ira Conversion

A traditional IRA is an individual retirement account that allows the depositor certain upfront tax advantages one of which is that most deposits are tax deductable. Another big advantage is that when the individual retires and starts to withdraw some of the funds they are usually in a lower tax bracket thus lowering the amount of taxes actually paid.

There are several disadvantages to a traditional IRA that might cause an individual to rethink their initial investment into the traditional and consider other options. These disadvantages include all withdrawals being subject to income taxes and mandatory withdrawals at age 70 ½.

Even though most people will be in a lower tax bracket when the time comes to withdraw funds from their IRA most people do not like the mandatory forced withdrawal. This reason alone causes many people to consider conversion of a traditional IRA to a Roth IRA.

A traditional to Roth conversion has several criteria which must be met. First, up until 2010 you are not allowed to convert if your filing status was married filing separately unless you and your spouse lived apart for the entire year. That rule becomes null in 2010.

Secondly, your modified adjusted gross income cannot exceed $100,000. This amount applies for both individuals as well as couples. Along with the filing status rule, this income limit goes away in 2010.

Although you may have to pay income taxes on part or even all of the funds you convert from a traditional IRA to a Roth, from the day of conversion no funds or interest gained in the Roth IRA is taxable and contributions can continue even after retirement. Also there is never a mandatory withdrawal age.