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ROTH CONVERSION IRA PLANS
- What is a ROTH IRA?
- Answer: A
ROTH IRA is a retirement account whereby individuals can put up to
$4000 (non-deductible) per year of earned income into the plan,
with a $500 addition permitted for those over 50 years of age.
While in the plan, asset growth, dividends and interest are not
taxable, and monies withdrawn from the plan are tax free under
certain conditions.
- What is a ROTH CONVERSION IRA?
- Answer: A
ROTH CONVERSION IRA is a retirement account established when
someone converts from a Regular IRA.
- When was a ROTH CONVERSION IRA
first made
available?
- Answer:
January 1998.
- Can anyone convert from an IRA to a ROTH
CONVERSION IRA?
- Answer: No.
Conversion from a Regular IRA to a ROTH IRA is NOT allowed when
modified adjusted annual gross income exceeds $100,000 (married
couples filing jointly and single filers) or more per year during
the year in which the conversion takes place.
- What if I convert from an IRA to a ROTH
CONVERSION IRA and then discover that I've exceeded the income
eligibility requirement?
- Answer: The
conversion is reversed without tax penalties.
- Can anyone convert from other type of
retirement plans (401K, 403B/TSA, Sep-IRA, SIMPLE IRAs and the
like to a ROTH CONVERSION IRA?
- Answer:
Generally, if these type accounts allow conversion to IRAs, then
the IRAs can be converted to ROTH CONVERSION IRAs. Restrictions
might apply for individuals still employed and participating in
company or organizational sponsored plans.
- What happens from a tax point of view when I
convert to a Roth IRA?
- Answer: The
entire amount converted is subject to income taxes. Basically,
whatever amount is converted is added to your other income during
the year and taxes are due on that new total gross amount at
whatever rate is appropriate for your filing.
- If I convert to a Roth IRA when are the taxes
due on the conversion?
- Answer:
Taxes are due when you file your tax return for the year. However,
if you convert in 1998 then the IRS permits you as an option to
divide the converted amount by four and add those equal amounts to
your gross income yearly over the next four years, taxes are then
due when you file your return for the appropriate year.
- Can I withdraw funds from my converted Roth IRA
to pay the taxes due?
- Answer: No.
Taxes must be paid out of other funds.
- Why would anyone want to pay taxes now? All
things being equal, isn't someone always better off deferring
taxes as long as they can, since then can use those tax monies to
compound and grow within an account?
- Answer:
Yes. Generally speaking, too longer one can defer tax expense the
better off you are, since you’re not in a 100% tax bracket at
least a portion of the compounded growth of the tax monies will
accrue to you on a net after tax basis. However, in the case of a
ROTH IRA CONVERSION account all things are not quite equal since
in this type of account the monies compound tax free as opposed to
compounding on a tax deferred rate.
- Can you provide examples of the lump sum net
after tax dollar difference between converting another retirement
plan in 1998 into a ROTH IRA?
- Answer:
Yes. Assume a 30 year old, 40 year old, 50 year old and 59 year
old all have $10000 IRAs, all want to access their account at age
65, all are in the 35% tax bracket now and all will be in the 35%
tax bracket later, all earn 10% on investment; given those
assumptions, then the net after tax advantage in favor of
converting to a ROTH IRA (per $10,000) for the 30 year old is
$79,264, for the 40 year old it's $26,301, for the 50 year old
it's $7,872, and for the 59 year old it's $2163.
- In a nutshell, and in just a few words can you
tell me why ROTH CONVERSIONS give you net after tax more than not
converting?
- Answer:
It's because by far the largest component of most retirement plans
is the growth component, not the contribution component; and the
deductible plans compounded growth is eventually taxable, whereas
the ROTH alternative compounded growth is tax free. It's sort of
like compounding out 8.0% NET-AFTER-TAX versus 10% TAX-FREE.
- Beside potentially a higher net after tax
advantage by converting, what other advantage, if any, can be
derived from converting to a ROTH CONVERSION IRA?
- Answer:
Withdrawals from ROTH IRAs are tax free if account opened at least
five (5) years and owner is over 59 1/2. At any age, after the
account is opened 5 years one can withdraw a lifetime maximum of
$10,000 (contributions and earnings) without taxes or penalties
for a first time home purchase for account owner or others. At any
age, after the account is opened 5 years for any reason one can
withdraw the amount(s) contributed (NOT
EARNINGS) without tax or penalties
from a ROTH CONVERSION IRA. Unlike Regular IRAs, there is no
requirement to ever withdraw from a ROTH IRA; hence, these
accounts can be held until death and passed on to spouses,
children or other heirs on a income tax free basis.
- Can I convert only part of my IRA to a ROTH
IRA?
- Answer: Yes
- Who can I name as the beneficiary of my Roth
IRA, and what happens to the account value when I die?
- Answer:
One can name whomever they wish as beneficiary, subject to some
state residence laws. Anyone named as beneficiary receives the
income from the ROTH IRA free of income tax. Spouses receive the
principal from a ROTH IRA estate tax
free, but other non-spousal
beneficiaries might receive less than the total value of the ROTH
because the distribution might be subject to federal and state
estate tax, which is dependent on the gross value of the deceased
entire estate.
- If I should decide to establish a ROTH IRA or
do a ROTH IRA conversion, what investment choices are available
for the funding?
- Answer:
There are families of mutual funds, variable annuities, bank CDs,
fixed annuities, equity indexed annuities, stocks, bonds and other
choices available for the funding these accounts. Which investment
selection is most appropriate,
depends very much on your personal
objectives. Each asset form has certain advantages.
- All Mutual Funds, Variable Annuities and
Variable Life Insurance policies are offered by prospectus ONLY.
For complete information including charges and expenses obtain a
prospectus, and read it carefully before you invest.
- Mutual Fund, Variable Annuity and Variable Life
prospectuses are available directly from the issuing companies
when product information is requested, and in some cases, they can
be downloaded directly on the issuing company's internet website.
- The tax deferral characteristic associated with
variable annuities is not needed when used in an account that is
by definition tax deferred (retirement accounts) and according to
some sources variable annuities generally have higher fees and
internal expenses than mutual funds.
- Systematic and dollar cost averaging within
Mutual Funds, Variable Annuities and Variable Life insurance
policies does not assure a profit and does not protect against
loss in declining markets. It involves continuous investment in
securities regardless of fluctuating prices and the investor
should consider his or her financial ability to continue purchases
through periods of low price levels.
- Investing in stocks, bonds, mutual funds and
variable annuities does not guarantee a profit. All of these
investments can lose money.
- Stocks, bonds, mutual funds and variable
annuities are not FDIC insured.
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