10 Reasons to Convert to a Roth IRA

by Fern LaRocca CFP®

in 401K Maximum,Roth IRA Rules

There is no hard rule about who is best served by converting to a Roth IRA since everyone’s individual’s financial, income tax and wealth situations are different. But here are 10 reasons why you would consider a conversion:

1. Taxpayers have special favorable tax attributes including a high basis ration, charitable deduction carry-forwards, investment tax credits, net operating losses, etc. These attributes reduce the effective tax rate of the conversion.

2. Suspension of the minimum distribution rules at age 70 1/2 provides  a considerable advantage to the Roth IRA holder. This allows for additional tax free deferral.

3. Taxpayers benefit from paying income tax before death ( when Roth IRA conversion is made) compared to the income tax deduction obtained when a traidtional IRA is subject to estate tax. The 691(c) deduction is inefficient.

4. Taxpayers who can pay the income tax on the IRA converison from non-IRA funds benefit greatly from the Roth IRA because of the ability to enjoy greater tax-free yield. This moves funds from a taxable to a tax free asset class.

5. Taxpayers who need to use IRA assets to fund their Unified Credit bypass trust are well advised t consider making a Roth IRA election for that portion of their overall IRA funds. The exemption is funded on an after-tax basis.

6. Taxpayer making the Roth IRA election during their lifetimes reduce  their overall estate, therby lowering the effect of higher estate tax rates.

7. Because of federal tax bracket are more favoriable for married couples filing joint returns than for single individuals, Roth IRA distribution won’t cause an increase in tax rates for the surviving spouse because the distributions are tax-free.

8. Post-death distributions to beneficiaries are tax-free.  This is possbly the most advantageous aspect of a Roth IRA conversion.

9. Tax rates are expected to increase in 2013 or later. Higher tax rates means more tax will be paid on taxable IRA distibutions than the tax that would be paid on the converison at a lower rate.

10. 3.8% Medicare surtax. Future distributions from Roth IRA accounts will not increase Modified Adjusted Gross income for purposes of the Medicare surtax beginning in 2013.

submitted by Bob Keebler.

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