If your adjusted gross income is $100,000 or less, you can convert your old-style IRA to a Roth so all future earnings inside the account will be tax-free.
However, if you are married and file a separate return, you are forbidden to covert an old IRA to a Roth.
Although rolling old IRA money into a Roth sounds great, there's a catch: To do so, you have to pay tax on the amount rolled over -- except to the extent that you have made nondeductible contributions to the old IRA.
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Say, for example, that your IRA holds $100,000, all of it from deductible contributions and tax-deferred earnings. To convert that IRA to a Roth, you'd have to report and pay tax on that $100,000 in your top bracket. Ouch!
If you can pay the tax bill without tapping your IRA funds, switching to a Roth account can put you far ahead of the game because it lets you keep more money in the tax shelter.
| Warning! |
| There's a big catch to using IRA money to pay the tax on a Roth conversion. If you're younger than 59½ you'll probably have to pay a 10% and possibly even a 20% penalty on the amount that's not rolled over into the Roth or rolled into a Roth and then pulled out to pay the tax. |
Converting to a Roth is not an all-or-nothing deal, though. If you have several old IRAs, you may convert one or more to Roths and maintain the others; in other words, convert smaller sums each year and pay only the tax on those sums.
Use our conversion worksheet to see if a switch makes sense for you, and read Roth or Deductible IRA? for more information.
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