If you have a traditional IRA, SEP IRA, SIMPLE IRA or a retirement plan such as a 401(k) or 403(b), you may be able to convert it to a Roth IRA. Undergoing a conversion, or rollover, from a tax-qualified plan to a Roth IRA comes with its fair share of benefits and drawbacks, mostly in the form of taxation. Consult with your tax adviser before making the jump as pros and cons vary on a case-by-case basis.
As a Roth IRA owner, you escape the rules of required minimum distributions, or the amount that you must withdraw annually, during your lifetime. This allows your retirement fund to grow uninterrupted. With a Roth IRA, you can still contribute to the fund after the age of 70 as long as your contributions fall within income limits. Rolling over to a Roth IRA does not constitute a change of ownership; as such, death benefit riders -- such as ancillary medical- insurance plans -- remain unchanged. These pros may lead to increased investing flexibility and consolidation of your assets, the latter of which may reduce the amount you have to pay in estate taxes.
According to the insurance providers at MetLife, those who plan on spending their IRA funds within five years of rolling over should not convert to a Roth IRA. After death, required minimum distributions rules still apply to Roth IRAs. Rolling over to a Roth IRA does not serve any real purpose if you plan on leaving your IRA to a tax-exempt charitable organization.
By rolling over to a Roth IRA from a traditional tax-qualified IRA, you completely free your plan's qualified distributions -- or withdrawals -- from taxation. However, converting to an IRA incurs taxes on any funds not yet taxed. These taxes may apply to the entire worth of your IRA. Those who converted in 2010 had the option of spreading their taxable amounts between 2011 and 2012 gross income or reporting the full taxable amount.
As of August 2011, there are no income- or filing-status restrictions for converting a Roth IRA. When you convert to a Roth IRA, your insurance company determines its value, which in turn determines the amount you will have to report as part of your income. You can undo a Roth IRA conversion via "re-characterization," a trustee-to-trustee transfer that restores your Roth IRA to a regular tax-qualified plan.
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