Roth IRA Conversions - 2012 is the year to Convert your IRA!
What is a Roth IRA Conversion?
Pay Tax Now for Future Tax Savings
The big concern with a Roth conversion is that it is a taxable distribution from your traditional IRA. You do not pay the 10% early distribution penalty if you are under age 59 1/2. Nevertheless, the transfer is a a taxable payout from your traditional account with the money then going into your new Roth account.
The conversion will increase your Federal and State income tax bill for this year.
The downside is you will pay tax this year on the amount converted.
Advantages of a Roth IRA Conversion
The following advantages probably outweigh the extra tax paid in 2012:
- Income tax rates will increase in 2013. The "Bush tax cuts" will expire after December 31, 2012 unless Congress enacts tax law changes. If you convert in 2012, you will pay the current rates not the probably higher rates of 2013.
- Roth withdrawals are Tax-Free. If you are over 59 1/2 and have a Roth for more than 5 years, you can take withdrawals free of Federal Income Tax. Most states also do not tax the withdrawals. Therefore, even if income tax rates skyrocket, you will have only paid tax at the lower 2012 rates. Further, you will pay no tax on the future earnings in the Roth IRA.
- Converting in 2012 avoids Obamacare 3.8% tax. The new 3.8% Medicare surtax on investment income, is based upon total income. Even though the conversion in 2013 will not be surtaxed, it will increase total income and may cause the 3.8% surtax on your other investment income. Nobody who converts a Roth IRA this year will be exposed to the Obamacare surtax.
- No Required Minimum Distributions. At age 70 1/2, the government forces you to take distributions from a regular IRA even if you do not want them. Roth IRAs are exempt from the required minimum distribution rules. Money can be kept in a Roth IRA and continue earning free of Federal and mot State Income Tax for your lifetime. Note: Roth IRAs are still subject to Federal and State Estate Tax.
Conclusion:
Unless you have exceptionally large gains or income in 2012, the time to convert to a Roth IRA is now!
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