Is a Roth IRA conversion right for you?

BOCA RATON, FL, March 14, 2011 (Press-News.org) Beginning in 2010, there was a major change to Individual Retirement Accounts (IRA's) that allows more investors the ability to "convert" their traditional IRA's to ROTH IRA's. How could this affect you? First let's distinguish the general difference between a traditional IRA and a Roth IRA. A traditional IRA is a retirement account that allows investors to contribute funds on a tax deductible basis. The investments grow tax deferred and when the funds are taken out, typically at retirement, withdrawals are taxable. The ROTH IRA works a bit differently. With a Roth, contributions are made with after tax dollars and are ultimately withdrawn tax free. Since the money will be used in retirement, most investors believe that a tax free withdrawal (Roth IRA) will be more efficient than a taxable one (Traditional IRA). So the question is often asked, "Which account is better?"
 
The major changes began on January 1, 2010. Any investor with a traditional IRA was allowed to "convert" it to a ROTH account without an income restriction. Previously the IRS only allowed account holders with an adjusted gross income of less than $100,000 to convert to a Roth. Now that this income restriction is waived, many more people qualify for the conversion. When converting to the Roth, the amount that is converted must be included as income and tax must be paid for the current tax year.
 
Is a Roth IRA conversion right for you? Well, it depends. Generally speaking, two things are important to consider. One, how many years until you start using the funds for retirement? The longer the time period the better because you may need considerable time to "make up" for the tax bite. Two, do you have sufficient funds outside the IRA to pay the tax? Ideally that tax should be paid from a source other than the IRA, especially if you are older and are using these retirement funds.
 
Before you consider a Roth conversion, do your homework. There are certain financial calculators that will help you calculate if this financial strategy makes sense.

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Chris specializes in assisting those nearing retirement and in their retirement years. He has written numerous publications designed to help people avoid making common mistakes with their everyday financial decisions. In addition, Chris has held hundreds of public and private investment planning workshops that are designed to inform and educate individuals about investing and retirement planning. He has authored "Six Costly Life Insurance Mistakes and Some Simple Ways to Help You Avoid Them," a booklet that reveals many unknown facts about life insurance and informs readers how to protect themselves and their families from making costly mistakes. Chris is also the author of the popular financial book, "The Real Truth About Your Money: Simple Answers to Smart Financial Questions". http://www.chrisnicholsadvisor.com/PDF/The_Real_Truth_About_Your_Money.pdf