February 1, 2004
Taxes On Roth Iras
I’ve heard so many good things about the Roth IRA that I am considering opening an account. I would like to close my traditional IRA and use it to open the Roth, but I’m not sure about my tax liability. Any advice?
–N. Jones, Via the Internet
What you’re considering is called an IRA conversion. First, you must make certain that you’re eligible for one. Your gross adjusted income has to be less than $100,000 if you’re single and less than $150,000 if you’re married. But if you’re married and file separate tax returns, you are not eligible to convert a traditional IRA to a Roth.
If you’re under 50, you can contribute up to $3,000 in after-tax income to a Roth IRA ($3,500 if you are 50 or older) and your money will earn interest tax-free. Converting to a Roth gives you the advantages of tax-free withdrawals after you reach age 591/2, no mandatory withdrawal schedule after retirement, and tax-free transferal to heirs after death. You can also make penalty-free withdrawals of up to $10,000 before age 591/2 for a first-time home purchase or for education expenses.
What you give up by switching to a Roth IRA is the benefit of taking the tax deduction on your contributions. Also, when converting to a Roth, you must pay the tax on the amount in the traditional IRA in your top tax bracket. And make sure you pay the tax on the Roth conversion without using the money in your IRA, or you may be subject to a steep penalty.
And a last but important consideration: The faster you switch to the Roth IRA, the longer your money will have to earn interest tax-free.
Mail your money management questions to Ask B.E., BLACK ENTERPRISE, 130 Fifth Ave., New York, NY 10011, or send an e-mail to firstname.lastname@example.org.