Terry Mitchell is the owner and operator of Foxrater - http://www.foxrater.com - the web's top free insurance quote site. It allows people to enter their zip code and compare the rates of auto, homeowners, health, and life insurance companies doing business in their area.
Considerations when Converting from a Traditional to a Roth IRA
IRAs are confusing, because there are so many different types. The two most commonly used IRAs are traditional and Roth. Both allow taxpayers to contribute up to $2000 each year to the IRA and offer tax benefits. Traditional IRAs allow the taxpayer to deduct all or a portion of the money contributed to the account on the federal tax return, depending on the adjusted gross income. Roth IRAs do not allow deductions for contributions.
This may make it seem as though traditional IRAs are the best choice, but with a traditional IRA you will pay income tax when you receive the distributions from the fund. With a Roth IRA, you do not pay taxes on the distributions. This difference makes Roth IRAs much more popular than traditional ones, and many people are now looking to convert their traditional IRAs to a Roth so that they can pay taxes now, not later.
Before you do this, make sure you can. You can only convert a traditional IRA to a Roth IRA if your income is $100,000 or less. You also must be single or married but filing jointly. Keep in mind that the $100,000 income limit is set to disappear in 2010.
For most individuals, converting from a traditional IRA to a Roth IRA is the best option. However, you need to make sure that you will be able to pay taxes on the earnings and contributions as you make them. Make sure that is something you can afford to pay now, keeping in mind that if you don't, you will have to pay taxes on the money when you take it out during retirement.
Those who stand to benefit the most from converting are the youngest investors. This is because they have a lot of time to let their money grow and offset the short-term tax liability.
If you are considering this option, look at all of the factors. Take some time to crunch the numbers, and make sure that you will benefit from the conversion. While tax-free income during retirement is appealing, this is not the best option for everyone, so do your research first.
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About the Author:
Terry Mitchell is the owner and operator of Foxrater - http://www.foxrater.com - the web's top free insurance quote site. It allows people to enter their zip code and compare the rates of auto, homeowners, health, and life insurance companies doing business in their area.
Author: Terry Mitchell