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Convert to a Roth IRA

Questions to Ask before Converting to a Roth IRA

For more than 35 years, traditional individual retirement accounts (IRAs) have provided tax advantages – including tax deferral and the potential for a tax deduction – to people saving money for retirement.* Roth IRAs were introduced in 1998, offering a different set of advantages, including the potential for tax-free withdrawals. But there were limitations on who could convert a traditional IRA to a Roth IRA. Now, that's changing.

Q: What's new?

A: Beginning Jan. 1, 2010, conversions from a traditional to a Roth IRA are no longer limited to taxpayers with a modified adjusted gross income of $100,000 or less, as they were prior to that date. In addition, married couples who file separately are no longer prevented from making a conversion. Starting Jan. 1, anyone can convert a traditional IRA to a Roth IRA.

Q: What are the tax consequences of converting to a Roth?

A: You owe ordinary income taxes on all or a portion of the amount converted, depending on whether you made deductible or nondeductible contributions to the traditional IRA. Usually, the tax is due when you file a federal income tax return for that year. But if you make the conversion in 2010, you have two options: 1) include the conversion on your 2010 tax return or 2) split it equally between your 2011 and 2012 tax returns.

Q: What are some potential advantages of converting a traditional IRA to a Roth IRA?

A: Distributions from a Roth IRA are tax-free if you're age 59½ or older and have held the account at least five years.** You are not required to begin taking minimum distributions at age 70½, as you are with a traditional IRA. Distributions are not required during the original account holder's lifetime (but they are required for beneficiaries). And if you leave the account to heirs, your beneficiaries can receive the assets tax-free.

Q: What are some reasons I might not want to make the conversion?

A: Converting may not make sense if you:

  • Don't think you'll be in the same or a higher tax bracket in retirement. The taxes you pay on the conversion could end up being higher than the taxes you'd pay when making withdrawals from your traditional IRA, if you didn't convert it.
  • Can't pay the taxes on the conversion from sources other than your IRA. If you're younger than age 59½, you'll probably owe a 10% penalty on IRA funds withdrawn to pay taxes. And in any case, you'll lose the potential benefit of tax-free growth on that amount.
  • Don't have a long enough time horizon to allow a Roth's tax-free earnings to compensate for the taxes you pay on the conversion.

With so many factors to consider, deciding whether to convert a traditional IRA to a Roth IRA is a complex decision. Visit with a Personal Banker at any Community Bank location for more information. In addition, it's always a good idea to visit with your tax planner or accountant to help you weigh the pros and cons to arrive at an answer that's right for you.

* Taxes will be due upon withdrawal at ordinary income tax rates. Premature withdrawals – generally, those made before age 59½ – may be subject to a 10% tax penalty, as well.

** Premature withdrawals – generally those made before age 59½ or within five years of opening the account – may be subject to ordinary income taxes and a 10% tax penalty.