Is Your Funds Eligible for a Rollover IRA/Roth IRA Conversion?

30 Apr

With the legislative changes taking place in 2010 for Rollover IRA/Roth IRA Conversion, many people are considering rollover their existing IRAs to Roth IRAs. Although there are some limitations, chances are your funds are eligible for a rollover IRA/Roth IRA conversion.

Prior to 2010, your ability to convert funds to a Roth IRA was restricted by many things, including your tax filing status.  If you were married but filing separately, for example, you had to be separated from your spouse for an entire year in order to be eligible.  Now, however, there’s no longer a rule prohibiting people who are married but filing separately from converting their accounts.  If you have recently divorced or are in the process of filing for divorce, it makes sense to talk to a financial planner about saving for your retirement, as well as providing for any children or beneficiaries you may have.

Your adjusted gross income was also a factor in Roth IRA conversions before 2010; you weren’t eligible for a conversion if your modified adjusted gross income was more than $100,000.  As of 2010, this income limit no longer applies.  However, bear in mind that this repealed restriction applies only to Roth IRA conversions – traditional income restrictions still apply to future contributions made to Roth accounts.

In addition, while the IRS used to place limitations on the types of IRAs that could be converted into Roth IRAs, this has now changed – with a few exceptions.  A Simple IRA can be converted to a Roth IRA after you’ve been a participant in the Simple IRA for a minimum of two years, while designated Roth IRAs still cannot be converted to Roth IRAs.  Besides these two distinctions, your IRA should be eligible for rollover and/or conversion to a Roth IRA.

The most important thing to keep in mind when you’re considering a rollover IRA/Roth IRA conversion is taxes.  You see, the money in your IRA is money you’ve earned – either as income or interest – but that you haven’t yet paid any federal or state income tax.  Money in a Roth IRA, on the other hand, is money that has already been taxed.  This means that if you rollover your IRA into a Roth IRA or convert your IRA to a Roth IRA, you’ll have to pay taxes on the portion converted.

The fact that you’ll owe taxes if you rollover or convert your money to a Roth IRA was previously seen as a disadvantage by those who would otherwise be ideal candidates for Roth accounts.   However, many participants are beginning to seeing the advantage of paying taxes now, in anticipation of tax rate increases later in life.  There’s also the advantage of paying taxes now, rather than leaving that burden for the inheritors of your estate.  Your tax accountant or financial planner can help you to understand the tax implications of an IRA rollover/Roth conversion and to decide if it makes good financial sense for you.

In fact, any time you’re considering a Roth IRA rollover, it makes sense to meet with your tax accountant and financial planner and review your financial goals, particularly because IRA rollover questions usually arise when you’re changing jobs.  Any time you make a major financial change, it’s a good time to step back and reassess your retirement savings goals.

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