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Started By
Message
Convert my traditional IRA to a Roth?
Posted on 3/6/13 at 10:08 am
Posted on 3/6/13 at 10:08 am
Broker wants me to switch over. Says advantages are I won't be forced to remove money at 70 and I won't be subject to ordinary income tax when distributed.
Roth: "Money grows tax-deferredd and is tax-free when distributed, as long as certain criteria are met." ... that 'certain criteria' bothers me; I'm asking for a clarification.
My current tax rate is low, so being taxed on the conversion of "pre-tax assets" should not be a problem.
Roth: "Money grows tax-deferredd and is tax-free when distributed, as long as certain criteria are met." ... that 'certain criteria' bothers me; I'm asking for a clarification.
My current tax rate is low, so being taxed on the conversion of "pre-tax assets" should not be a problem.
Posted on 3/6/13 at 10:39 am to Fat Man
quote:
Roth: "Money grows tax-deferredd and is tax-free when distributed, as long as certain criteria are met."
Pros: You can withdraw from the Roth anything you put into it whenever you want, no penalties, no taxes, no questions other than filling out a form. It's not much more involved than taking money from your checking account. That's the contribution part. Anything you earn above what you contribute is still subject to early withdrawal penalties and such, but is totally tax free. Not tax deferred.
What's the downside? Mostly the fact that when you do the conversion you will pay all the tax up front. The IRS is still getting paid, that's why they don't care if you withdraw it later.
Purely financially the Roth vs. traditional question is more or less a tossup. I like having a Roth simply because it means I don't have to consider it as "locked-up" money. Instead of diverting funds to a taxable savings account I just stuff as much as possible to a Roth. I can get it back with no fuss or penalty in an emergency, and in the meantime get tax-free returns. That beats a savings account any day.
Posted on 3/6/13 at 11:24 am to foshizzle
quote:
but is totally tax free. Not tax deferred.
nice.
quote:
the conversion you will pay all the tax up front.
this needs to be my calculation.
Thanks.
Posted on 3/6/13 at 9:47 pm to Fat Man
Like I said, for most people it's a tossup. But I like it since it is essentially an emergency fund with tax-free returns. With this setup you don't really need a separate emergency fund anymore, put those funds directly into the Roth instead.
Posted on 3/6/13 at 9:56 pm to foshizzle
quote:
With this setup you don't really need a separate emergency fund anymore, put those funds directly into the Roth instead.
This line of thinking depends on the person. For some people, having a retirement fund that muddles with their "emergency" fund is not the best idea.
Posted on 3/6/13 at 10:01 pm to LSUtoOmaha
quote:
For some people, having a retirement fund that muddles with their "emergency" fund is not the best idea.
I honestly don't get this. You don't withdraw from either unless you simply have to, and a tax-free account beats a taxable one.
Posted on 3/6/13 at 10:25 pm to foshizzle
I agree with you. However I think many less rational folks would end up dipping into their retirement account too often if there was not a barrier, such as a penalty.
Posted on 3/6/13 at 10:32 pm to Fat Man
The distribution rules for a Roth conversion are slightly different than those of normal Roth contributions. With a conversion, there is a five year rule for it to be distributed tax free which is not the case for normal Roth contributions. My guess is this is one of the criteria he had in mind. They have some further info on this here. LINK
Posted on 3/7/13 at 7:43 am to cdl2006
quote:
, there is a five year rule for it to be distributed tax free which is not the case for normal Roth contributions.
got it. thanks.
Posted on 3/8/13 at 10:21 pm to cdl2006
quote:
With a conversion, there is a five year rule for it to be distributed tax free which is not the case for normal Roth contributions.
Excellent point.
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