You have, no doubt, heard the term IRA thrown around quite a bit over the last several years. Maybe you haven’t given any thought to how this savings vehicle might fit into your retirement or family financial plan. If not, now is the time to take a look at the IRA or Individual Retirement Account. There are a few options when it comes to IRA’s. Here we will look at one option for these retirement accounts called the ROTH IRA.
Many of us have groaned about what we feel is excessive taxation of our assets. We’d like to keep more of our hard earned money to meet our personal obligations as well as help fuel our dreams. In these instances a ROTH IRA can be particularly appealing as it is a wonderful tool for protecting your assets against excessive taxation. For example, did you know that you could save a substantial amount of money simply by converting your regular IRA into a Roth account? Such a conversion could potentially reduce your estate taxes, which your heirs would almost certainly appreciate. After all, it’s your money; wouldn’t you rather have it provide for your family after your death than go into a tax pool that may not directly benefit your heirs at all?
Benefits of a ROTH IRA
A significant benefit of the ROTH IRA has to deal with its exclusion from the minimum-withdrawal rules that apply to other types of IRAs. To decide if switching to a ROTH IRA is right for you it is a good idea to review the benefits of your current savings vehicle in relationship to your savings goals. You may even what to use your computer to write out a side by side comparison (pen and paper works, too).
If your review reveals that the benefits of another IRA are more attractive you may be able to convert your regular IRA to a ROTH IRA (check with your tax advisor to help you understand any avoid any potential penalties). You may not be eligible to convert to a ROTH IRA if your adjusted gross income exceeds $100,000. Also, you should be aware that if you convert after you reach 70 1/2, you may be required to take a final minimum withdrawal in the conversion year.
It is important to remember that any accumulated earnings will be taxed along with any tax-deductible contributions when you make the Roth conversion. You can ease the burden by paying the tax with non-IRA assets. This is a good option because it reduces the tax burden of your heirs without exhausting your estate tax exemption. An added bonus – you reduce the size of your taxable estate.
Your heirs will appreciate being shielded from income tax on withdrawals from their Roth inheritance. If they don’t need the money immediately, they may even want to consider taking money from the account in small increments over a period of time so that the balance continues to build as tax free income