With the current state of the economy, many people have watched their individual retirement accounts (IRAs) take a dramatic fall in value. Since 2010, some of the restrictions on converting a traditional IRA to a Roth IRA have been lifted to help ease the tax burden when the accounts regain, and hopefully surpass, the value they once had.
First of all, what is the difference between a traditional IRA and a Roth IRA? From a tax perspective, a traditional IRA is pre-tax money held in an investment account. When you begin taking distributions from the account at retirement, you pay the taxes on those distributions. Contributions to a Roth IRA, on the other hand, are taxed before they are made. Therefore, the distributions are not taxed when taken. The other main difference between them is that with a traditional IRA, you will have mandatory minimum distributions upon reaching age 70½. You do not have mandatory withdrawals from a Roth IRA.
Prior to 2010, if your Adjusted Gross Income (AGI) was higher than $100,000, you were not only ineligible from contributing to a Roth IRA, but you were also not allowed to convert from a traditional IRA to a Roth IRA. While the contribution limit will still be in effect, the conversion restriction will not. Therefore, you can convert your traditional IRA to a Roth, but you will still be unable to contribute additional funds to it. This would be beneficial for someone who expects to be in a higher tax bracket after retirement than they are now. Your wealth would grow tax-free after converting, so you would not have to pay any tax on the distributions you take later. While this sounds like a good deal, one major caveat is that you must pay the tax on the amount you are converting from a traditional IRA to a Roth.
Another benefit to the Roth IRA over the traditional IRA is that the tax is paid up front. The distributions you take after retirement are tax-free and they are not mandatory. Since you are not required to take distributions from a Roth IRA, you can let the account continue to generate wealth for a longer period of time. Not only are the distributions that you take from the Roth never taxed, but the earnings on the account are never taxed since the tax was paid on the money before it was contributed.
You should consult your tax consultant and investment adviser before making any decisions on what to do with your retirement accounts. If you would like additional information on this topic, please contact Henssler Financial at 770-429-9166 or experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
