|
Take these considerations into account before converting your traditional IRA to a Roth IRA.
Although predicting how much you’ll earn on your investments over the long term is guesswork, you need to make some estimates to help you decide whether to convert to a Roth IRA.
Be aware, however, that the rates you use in your calculations will affect the outcome – especially if you’re close to retirement. The higher the investment return you project, the more likely conversion will look good. That’s why it’s important to be realistic in your estimates and to remember that your actual investment returns may turn out much lower or higher.
When you convert to a Roth IRA, the taxable amount you convert is included in your income and you’ll end up with a larger tax bill.
A conversion may also bump you into a higher tax bracket, which means you’ll pay a higher tax rate on some of your conversion income. (Note that only the portion of your taxable income that falls into the higher tax bracket will be taxed at the higher rate.)
The extra income may also affect your eligibility for some tax breaks. For instance, if you have children the extra income may push you above the income thresholds for the child tax credit or the college tax credits. What’s more, if you’re seeking needs-based financial aid for your college-bound child, the additional income could affect your eligibility.
To lower the annual taxable income from the conversion, you have the option of making only a partial conversion or partial conversions over several years.
One disadvantage to consider in the tax year you convert: The phantom income from a Roth IRA conversion may push your annual taxable income above the level that triggers tax on any Social Security retirement benefits you receive.
On the positive side, once you’re retired qualified withdrawals from a Roth IRA are free from federal tax and won’t be included in your income, unlike a traditional IRA. Accordingly, Roth IRA distributions won’t raise your tax bill on your Social Security retirement benefits.
Article is for educational purposes only and is not intended to provide specific tax or legal advice. For answers to tax questions, please see your tax professional. For legal questions, consult an attorney.
Representatives are registered, securities are sold, and investment advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC, a registered broker/dealer and investment advisor, 2000 Heritage Way, Waverly, Iowa 50677, toll-free (800) 369-2862. Nondeposit investment and insurance products are not federally insured, involve investment risk, may lose value and are not obligations of or guaranteed by the financial institution. CBSI is under contract with the financial institution, through the financial services program, to make securities available to members. CUNA Brokerage Services, Inc., is a registered broker/dealer in all fifty states of the United States of America. The Representative may also be a credit union employee that accepts deposits on behalf of the financial institution.
|
|
|
©1997-2009 CUNA Mutual Group.
|
|
