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Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next. Bankrate follows a strict , so you can trust that we’re putting your interests first. All of our content is authored by and edited by , who ensure everything we publish is objective, accurate and trustworthy. Our banking reporters and editors focus on the points consumers care about most — the best banks, latest rates, different types of accounts, money-saving tips and more — so you can feel confident as you’re managing your money. Bankrate logo Editorial integrity
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Bankrate’s editorial team writes on behalf of YOU – the reader. Our goal is to give you the best advice to help you make smart personal finance decisions. We follow strict guidelines to ensure that our editorial content is not influenced by advertisers. Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy. So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information. Bankrate logo How we make money
You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. Roth individual retirement accounts don’t offer an immediate tax savings as do some traditional IRA contributions. Rather, the taxed money you put in a Roth grows tax-free and you owe Uncle Sam nothing when you withdraw the funds as long as you’re at least 59½ and have had the account for at least five years. Bankrate s 2010 Tax Guide
Many people, however, haven’t opened a Roth. Some prefer the immediate tax deduction that a traditional IRA offers at filing time. Others weren’t able to open a Roth IRA because they made too much money. You can’t contribute the full amount to a Roth if, as a single filer in 2009, you made more than $120,000; the threshold for joint filers last year was $176,000. In 2010, the $120,000 cap remains for single taxpayers, but the couples’ earning limit is now $177,000. There also was a $100,000 income limit that prevented individuals from converting a traditional IRA to a Roth account. Now that limit is gone. Regardless of income, anyone can turn a traditional IRA into a Roth. Even better, any 2010 rollover from a traditional IRA to a Roth gets special tax treatment. Any included in the rollover doesn’t have to be reported on 2010 taxes. Instead, you can include that money as income in equal amounts in 2011 and 2012 and pay associated taxes when you file those tax returns. In this tax tip: Is converting worth it? Predicting the tax future. Expiring tax rates. Conversion mechanics. Decide if converting is worth it
What is your time frame? Generally, it makes less sense for older individuals to convert a traditional IRA to a Roth. The reason for that usually is related to the next question. Do you have cash on hand to ? When you convert a regular IRA to a Roth account, you’ll owe taxes on the original account’s earnings and pretax contributions. This tax bill is at your ordinary income tax rate; there is no capital gains break for IRA distributions. If you must take money out of your IRA to pay those taxes, you’ll put a dent in your retirement account’s compounding power. Plus, if you’re younger than 59½ you also will owe a 10 percent penalty on the converted amount. Essentially, raiding your IRA to pay conversion taxes (and penalties) could offset the possible future gains of tax-free Roth distributions. And don’t try to avoid conversion taxes by moving only nondeductible money from your traditional IRA. Once funds are in the account, the IRS considers the money blended, meaning you can’t separate deductible and nondeductible amounts. Finally, don’t forget about other tax breaks. Do you qualify for tax benefits that are based upon your income? Many tax benefits are reduced or eliminated altogether when you make over a certain amount. Will you still be able to claim them after you add the traditional IRA money to your income during the conversion to a Roth account? Predicting the tax future
However, if you have a good idea that your will drop substantially when you retire, you might want to stick with your traditional IRA. That will allow you to pay taxes years from now at a lower rate than what you’ll owe if you convert now. Similarly, if you think that tax rates will climb dramatically by the time you retire, you might want to convert now. Although we all grumble about them, tax rates are at historic lows. Given the federal deficit and the Obama administration’s plan to let his predecessor’s tax cuts expire at the end of this year, converting and paying taxes now could be a smart move. About those expiring tax rates
That means, for example, if you converted $100,000 that is taxable, you can count $50,000 of that as 2011 income and have until April 15, 2012, to come up with the due taxes. The next $50,000 would go into the 2012 tax year, giving you until April 2013 to pay that tax bill. Of course, those sums could push you into tax rates in 2011 and 2012 that are much higher than they are now. So even if you can spread the conversion over two years, it might be better to pay the full bill in 2010. You do have that option. But the choice to defer is only available for 2010 conversions. If you decide in 2011 to convert a traditional IRA to a Roth, you’ll have to pay all taxes due on your 2011 tax filing. In addition to answering these questions, you also should run the numbers. Bankrate’s can give you an idea of the change in total net worth, at retirement, if you make the move to a Roth. Conversion mechanics
If you’re happy with the custodian of your traditional IRA, let that company know that you want to convert the account to a Roth. You’ll have to sign a form or two, but the institution then should handle the rest. This trustee-to-trustee transfer is the best financial move. It will ensure that you don’t take possession of the rollover money and face possible redeposit problems. When you get a check that’s a distribution from your retirement account, you have 60 days to place the money into another qualifying retirement account. If you miss the deadline, the money is taxable and no longer eligible for rollover. Once the switch is made, the account custodian will notify you of your federal tax responsibility in connection with the conversion. Don’t forget Form 8606. If you made nondeductible contributions to your traditional IRA, you should have been filing these each year that you contributed. They will help you so that you do not have to pay Uncle Sam on that part of the conversion. With your new Roth IRA, be sure to name a new beneficiary. This document determines who ultimately gets the account money when you pass away. Finally, if you earn too much to contribute to a Roth, the removal of the conversion limits offers a work-around. Simply open a traditional IRA and then convert it to a Roth. And remember, you don’t have to convert your full traditional IRA. If you wish, you can move only a portion of your IRA into a Roth. A partial conversion gives you flexibility to choose how much of your traditional retirement account to move into a Roth and how to deal with the taxes implications of such an asset transfer. . Related Links: Related Articles: SHARE: Kay Bell Related Articles