Here are some common questions related to IRA conversions, along with the answers.What are the benefits of converting?
There are two key benefits. First, Roths offer tax-free withdrawals in retirement, whereas withdrawals from traditional IRAs are taxed as ordinary income. Second, Roths don't require you to take distributions during retirement, so if you don't need the money you can let the assets accumulate for your heirs.Who is a good candidate for conversion?
In general, younger people are better candidates for conversion than are older investors who are close to retirement or already retired. Those who have the cash on hand to pay the taxes associated with the conversion are also much better candidates for conversion than those who will need to tap the IRA assets to pay the tax. Investors who have a lot of assets in traditional 401(k)s and IRAs may also benefit from a conversion because it will diversify the tax treatment of their in-retirement withdrawals. Morningstar's IRA Calculator
can help you crunch some numbers.Who should think twice about converting?
A conversion will tend to be less attractive for older investors who are well into retirement; they won't have the chance to recoup the tax hit. Conversions are also usually a bad idea if tapping the IRA assets is the only way to pay conversion-related taxes. Finally, conversions won't generally make sense for those who haven't saved much for retirement and will therefore be in a lower tax bracket in retirement than they are now.Have the income limits for starting a Roth from scratch gone away?
The income limits to open a Roth IRA are still in place, as outlined in this overview
. In 2011, individuals with incomes of more than $122,000 who can also contribute to a company retirement plan can't open a Roth; the threshold goes up to $179,000 for married couples filing jointly. However, individuals whose incomes are over those limits can take a backdoor way into a Roth
, opening a traditional nondeductible IRA, then converting soon thereafter. They'd owe taxes on any investment earnings at the time of the conversion. This strategy doesn't make sense, however, for those with substantial traditional deductible IRA assets because the taxes associated with the conversion will be based on the breakdown between deductible and nondeductible contributions in the IRA.Can I roll over a regular 401(k) into a Roth IRA directly?
Yes, assuming you no longer work for the company where you amassed the 401(k). In this case, the rollover functions almost exactly like a conversion; you'll owe taxes on your deductible contributions and investment earnings at the time you convert. This article
discusses some of the key variables to consider when mulling a rollover.Will I owe taxes because of the conversion?
It depends. If you've made only nondeductible contributions and you don't have any investment earnings in the account, you won't owe taxes upon conversion. If, however, your IRA consists of deductible contributions, rollover assets from a traditional 401(k), and investment earnings--or some combination thereof--you'll owe taxes when you convert.