In a blog last month, I wrote about Roth IRAs and promised a future blog regarding conversions from a traditional IRA to a Roth IRA.
As I explained in last month’s blog, with traditional IRAs and 401(k)s, the contributions to the accounts are deductible when made. The money in those accounts builds tax-deferred. On the other hand, contributions to a Roth IRA or a Roth 401(k) are not deductible when made. After the account exists for a few years, the distributions from the account are tax-free. Here is the critical difference between a traditional and a Roth account. A traditional account builds tax-deferred while a Roth account builds tax-free. Not only do the dividends, capital gains, and interest earned in the account build tax-free, when distributions are eventually made, they come out tax-free.
Such a conversion can have many advantages:
- It can help bring additional income into lean years
- It eliminates having to take minimum required distributions after age 70 ½
- It increases the after-tax value of creditor-protected assets
- It decreases the taxable estate by the income taxes paid
When you’ve converted funds into a Roth IRA, you continue to face early withdrawal penalties for withdrawals before age 59 ½. In addition, you could face taxes or penalties for withdrawals within five years of conversion.
But, a conversion to a Roth can be a wonderful planning strategy for income taxation, estate taxation, asset protection, and simplicity.
Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (800) 846-1555