Can I Continue to Contribute to My IRA When I Convert to a Roth IRA?

by Craig Woodman

The Roth IRA is a retirement savings plan that allows you to save money and allow the returns on that savings to grow tax-free. Taxpayers who have money held in a traditional IRA also have the option to convert to a Roth. If you convert a traditional IRA to a Roth, the amount converted does not count as part of your yearly contribution. You may contribute up to your allowable limit to a Roth even when converting.

Reasons to Convert

In 2010, the IRS eliminated the $100,000 annual adjusted gross income cap for people converting a traditional IRA to a Roth, allowing any taxpayer with a traditional IRA to convert. By converting your deductible traditional IRA to a Roth, you lock in the tax savings for the future, as all of the funds in the account, including the earnings, may be withdrawn tax-free at retirement. If the funds are left in a traditional IRA, the gains will all be taxable when withdrawn at retirement.

Current Tax Liability

If you convert your deductible traditional IRA to a Roth, you will need to pay the taxes on the money that you convert. This money will be taxed at your normal rate for income. Depending on the size of the rolled over account, the tax liability could be significant. The increase in your taxable income could also significantly increase your tax bracket for the year. Consider paying the taxes on the conversion with funds held outside of the IRA. If you use retirement funds to pay the taxes, you could owe a 10 percent penalty for early withdrawal on that money.

Partial Conversion

If you convert a traditional IRA to a Roth, you have the option to convert a only a portion of the IRA, or you may convert the entire balance. The partial conversion may make sense if you cannot meet the tax liability resulting from converting the entire balance. Also, you may choose to keep some of your retirement funds in a pre-tax account to allow you to better control your taxable and tax-free income during your retirement years, to manage your tax liability more effectively.

Non-Deductible IRA Rollover

Non-deductible IRA contributions can be converted without incurring any tax liability. This is because the contributions were already taxed, and will not be taxed again. You will need to pay taxes on the gains earned from the non-deductible contributions that are converted to a Roth IRA.

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