For people wondering how to convert to Roth accounts their current Individual Retirement Accounts (IRAs) there are some key points that they should consider before jumping in whole hog. A Roth IRA allows a person to grow his or her retirement funds without having to pay taxes on the growth in the account. This can be a great option for certain people and is an enticing option for everyone who can qualify for a Roth IRA.
People who make less than $100,000 a year in modified adjusted gross income are eligible to start a Roth IRA as long as they are not filing taxes as “married, filing separately.” That means that the ROTH IRA is for the middle to lower economic classes. As long as a person has money that can be contributed to retirement, they can use a Roth IRA.
For those investors who believe that they can benefit from the tax free growth that a Roth IRA offers, it truly is a good way to invest those retirement funds, but the real question is “Is it a good idea to convert a 401K or other eligible retirement account into a Roth IRA?” That depends on a couple of factors – tax bracket at retirement vis-à-vis at investing age and tax costs that will need to be paid when the old retirement account is converted. A prospective investor may also look at the rate of return that he or she can expect in the differing accounts and the number of years left to retirement.
A person who expects to be in a higher tax bracket while in retirement as opposed to his or her current tax bracket can use the Roth IRA to protect some of his or her retirement money from the government. Because the growth of the Roth IRA is tax free, it doesn’t matter how much money that person gets form the Roth IRA, it will still be tax free. That will keep the person from paying more in taxes.
Converting to a Roth IRA requires that the person pay the taxes on the IRA that they are converting from. Often times, the amount of tax money due is more than the person can reasonably afford. While converting to the Roth IRA may be highly desired, if the person has to pay the taxes due at conversion out of the funds in his or her current retirement account, he or she should probably forgo the conversion. A good alternative is to convert only the amount of retirement funds that the person can afford to pay the taxes on at that time. This can be done on a yearly basis, reducing the person’s loss and keeping the integrity of his or her retirement funds.
Some IRAs have pitifully low rates of return, and a Roth IRA may offer a much better return. Over the course of several years, even a few percentage points of compound interest can make a huge difference to the final sum of money available at retirement.
A greater number of years until retirement may also make a Roth IRA highly desirable. It is these years of tax free compound interest that make some people salivate. Taxes are often blamed for financial instability. People, who don’t want to pay money to government on the money that they have worked hard to earn, can see the Roth IRA as a great investment.
A Roth IRA offers one big advantage over other retirement accounts because of its tax free status. Once the money I invested and starts making money, there is no need to worry about what the government is going to take. It offers a real time dollar figure that a person can count on having regardless of who is in office.
It Is Easy To Learn How To Convert To Roth Accounts