The Roth IRA is often promoted as an ideal retirement account because of the potential for tax-free withdrawals. With previous income limits restricting the eligibility to open and contribute to a Roth IRA, some investors have felt left out. Fortunately, the income limits to convert a Traditional IRA to a Roth IRA have been lifted – a potential boon to investors not eligible in the past.
Should an investor convert to a Roth IRA? Every situation is unique and many factors should be considered before moving forward.
The following are three potential advantages to converting to a Roth IRA.
Tax-Free Investment Profits
A Roth IRA allows investors to withdraw money from their accounts tax-free, both contributions and any earnings generated (as long as they meet the withdrawal qualifications). Combined with the power of compound interest, the potential to grow a large nest egg without taxes makes a Roth IRA an attractive option.
More Flexible Withdrawal Rules
With a Traditional IRA, money in the account cannot be withdrawn without a potential penalty until the account owner is 59 ½. Also, investors can no longer make contributions to the account once they turn 70 ½ years old, at which point they are forced to take distributions and begin paying taxes on that money.
A Roth IRA doesn’t limit contributions and there are no required withdrawals. Also, all contributions to a Roth IRA can be withdrawn anytime penalty-free. (Note: any earnings must remain in the account for at least 5 years and investors must be age 59 ½ to withdraw such earnings without penalty and tax-free).
There are other opportunities for qualified withdrawals from a Roth IRA, even if you don't meet the age or holding period requirement, including a first-time home purchase and qualified post-secondary education expenses.
Estate Planning Tool – Leave Your Heirs Tax-Free Money
Could an investor’s retirement account pass assets to his children or grandchildren after death with little or no tax? A Roth IRA could provide that possibility.
Here’s how: a Roth IRA account holder names a beneficiary to inherit the account after his death. When the account holder passes away, the beneficiary may choose to take a required minimum distribution which is based on the life expectancy of the account holder. By taking just a minimum amount each year (based on IRS life expectancy tables); it’s possible the beneficiary can “stretch” the account over many years, allowing the account assets to grow, receiving the tax-free withdrawals.
While every situation is unique, and investors should seek professional advice before making any financial decisions, there could be advantages to converting to a Roth IRA.
To discover more about Roth IRA conversions, check out a recent webinar on the topic