Should You Be Converting Your Traditional IRA Into a Roth IRA before Year’s End?

Article Highlights:

  • Roth IRAs provide tax-free earnings’ accumulation
  • Traditional IRA to Roth IRA conversions can be made
  • If this year is a low or negative income year, you will pay little or no conversion tax

There are two types of IRA accounts, traditional and Roth. With traditional IRAs, your contributions are generally tax-deductible when you make the contribution, and tax is not paid on earnings as they accumulate. When it is time to start withdrawing the funds, however, the subsequent distributions, including earnings, are taxable. On the other hand, while contributions to Roth IRAs are not tax deductible, earnings accumulate tax-free, and when the time comes to take distributions, all amounts distributed, including the earnings, are 100% free of tax.

The biggest advantage to Roth IRAs is the tax-free accumulation of earnings. Funds in IRA accounts can have significant earnings over the life of the account. And if those earnings end up being tax-free, as they do in a Roth IRA account, that is a huge tax advantage at retirement.

If you have a traditional IRA, you are allowed to convert all, or a portion, of the traditional IRA to a Roth IRA at any time, provided you are willing to pay taxes on the amount converted. If your income for 2013 is low or negative, you may be able to convert some portion of your traditional IRA to a Roth IRA with little or no resulting tax.

One of the best times to project your income for the year is close to year’s end. At the same time, any IRA conversion must be completed by year’s end. So, if you anticipate a low or negative income this year, and have a traditional IRA, don’t miss this unique tax-saving opportunity.

Please call this office for assistance with projecting your 2013 income and determining what amount you might convert to minimize the tax, if any. Remember, the conversion must be made before year’s end, so call early.

 

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