A Roth IRA conversion occurs when you transfer assets from another form of IRA to a Roth IRA. The transfer of these assets may be taxable, but that doesn’t necessarily mean it isn’t worthwhile. You can convert your assets through a direct rollover between trustees or by first withdrawing the funds individually and then moving them into the Roth IRA within no more than 60 days of receipt.
The primary advantage of a Roth IRA is that it offers tax free growth. Additionally, it is very simple to manage. There is no mandatory age at which you must start taking payments from a Roth IRA; some other retirement accounts force you to start withdrawals at the age of 70.5. What if you are still working at that time? Do you really want to chance being in a higher tax bracket?
Roth IRAs offer many advantages that aren’t available in other retirement accounts. For example, you can use some of the funds tax-free if you are purchasing your first house, regardless of how old you might be. As long as a 5 year “seasoning” period has elapsed after you convert your funds, and you are at least 59.5 years old, you can withdraw funds tax-free, as is the case with any funds directly deposited.
Of course there are disadvantages to Roth IRAs as well. Contributions are not tax deductible and therefore don’t affect your AGI.
There are laws defining who can make contributions to a Roth IRA. It is best to consult with someone who specializes in retirement planning if you are unsure of how the rules affect you.
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