Roth Ira

The Roth IRA is a product of the Taxpayer Relief Act of 1997. There are advantages that are available to Roth IRA investments which make them an excellent vehicle for building retirement wealth. Many people have thus considered the possibility that it may be better to convert IRA to Roth IRA.

The chief advantage of the Roth IRA is that it gives you the ability to have earnings from the investment completely tax-free when you (or your beneficiary) withdraw them, under certain conditions. There is a price for gaining this advantage: your contributions to the Roth IRA will not be tax deductible when you file your current tax return - which might make you wonder if you should convert IRA to Roth IRA.

There are other advantages in Roth IRA, which give you good reasons to convert IRA to Roth IRA. One other advantage is that minimum distribution rules don't apply in Roth IRA. If your other resources at retirement permit you to live without drawing on the investment, then you can keep your money in the Roth IRA when you reach age 70 ½.

That means your money continues to generate earnings tax-free. A third advantage is that you have a little more flexibility because you are allowed to take certain early distributions without being subject to an early distribution penalty. This makes it easier for you under Roth IRA to take your money out.

Most investment advisers agree that most people generally are better off when they convert IRA to Roth. The primary reason is that you hold after-tax dollars when you withdraw the Roth IRA, which means it is effectively bigger than the traditional IRA, at the time when you need the money most - when you're retired.

When you move money from a traditional IRA to Roth IRA, the transfer can be called a conversion or rollover. The tax treatment is the same, so these terms really mean the same thing. Normally, though, rollover is if you make the transfer by removing cash or assets from an IRA and later (within 60 days) contribute them to a Roth IRA (a rollover contribution). Usually, they say you convert IRA to Roth if you directly transfer the money from one to the other.

The question remains: are you eligible to convert IRA to Roth IRA? Yes, you are if:

 your modified adjusted gross income does not exceed $100,000;  you're single, or filing jointly with your spouse; if you're separated and filing separately, you must have lived separately for the entire year; and,  you're converting only an IRA to Roth IRA; you cannot roll directly from an employer plan to a Roth IRA.

You will have to pay tax in the year of that you convert IRA to Roth (because distributions from IRA are subject to tax) but many people believe that the long-term savings more than offset the conversion tax.