Roth Conversion

Roth IRA Conversion Rules Allow For A Tax-Free Retirement

There is no income limitation to converting your Traditional IRA to a Roth IRA.

With tax-free earnings and tax-free distributions, a Roth IRA can be a perfect way to provide for a tax-free retirement. Due to tax law changes in 2010, everyone has the opportunity to convert any or all of the funds in a traditional IRA or qualified plan to a Roth IRA regardless of income level or tax-filing status with absolutely no limit on the amount that can be converted.

Simply put, if you have a traditional IRA, you can convert to a Roth IRA. Previously, only taxpayers whose modified adjusted gross income was under $100,000 were allowed the conversion. As of 2010, anyone, regardless of income, may convert all or part of their traditional IRA and certain other retirement assets to a Roth IRA.

While both a traditional IRA and a Roth IRA offer special tax advantages, the tax rules for contributions and distributions are different.
Traditional IRA: 
Contributions to a traditional IRA are generally tax deductible. Also, a traditional IRA requires minimum distributions at age 72. When distributed, both your contributions and any investment gains will be taxable to you.
Roth IRA: 
Contributions to a Roth IRA are not deductible. When distributed, both your contributions and any investment gains are generally paid to you tax free, and there are no distribution requirements. Certain restrictions apply.

There are many advantages to converting to a Roth IRA:

  • Tax-free qualified distributions
  • Tax-free growth of earnings
  • Uncertainty about future tax rates eliminated
  • Lower taxes owed on retirement benefits like Social Security
  • No required minimum distributions tied to your age
  • Greater financial legacy to heirs

Tax savvy investors want to pay as little income tax as possible. And converting to a Roth IRA allows you to make smart tax moves that will save money in the long run.

Converting to a Roth IRA will guarantee you will owe no additional income tax on the converted funds during retirement. The balance in your portfolio will be what you can tap in retirement and you won’t have to calculate an after-tax balance.

When you convert from a Traditional IRA to a Roth IRA you pay income tax on the contributions. The taxable amount that is converted is added to your income taxes and your regular income rate is applied to your total income.

Access to Roth:

  • The IRS assumes that the first money withdrawn comes from annual contributions you made and this money can be tapped tax- and penalty-free at any time.
  • The IRS then assumes money withdrawn comes from converted amounts which are tax-free and penalty-free if you are older than 59 1/2 or the account has been open for at least five years.
  • Only after you retrieve all of your contributions and converted amounts do you touch earnings.  If at least five years have passed, the earnings are tax and penalty-free. So, if you convert $100,000 today, you can withdraw it all tomorrow tax-free. The 10% early-withdrawal penalty disappears once you reach age 59 1/2 or the account has been open for five years.


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