Many retirement savers have the idea of converting IRAs to Roth IRA accounts. The main reason of conversion is that in Roth IRA withdrawals from earnings during retirement are federal incomes tax-free when the owner is over 59 1/2 and have had the account for at least five years. Many individuals feel the need of conversion and before considering the conversion the owners need to carefully consider the individual requirements and carefully consider some other things before making a final decision.
Firstly the owner needs to consider the availability of appropriate funds to pay the Taxes on the Conversion as when Converting IRA to Roth IRA the owner will have to pay tax on any earnings and pre-tax contributions. This is in lieu of paying taxes upon later withdrawals from the Roth account. There is no way by which the owners can avoid the conversion tax by just rolling over an amount equal to the after-tax contributions. A percentage of the amount rolled over into the Roth account will be taxed.
By converting IRA to Roth the owner disqualifythe Tax deductions and benefits such as the child tax credit and the higher education tax credits. The conversion income could push the owner into a higher tax bracket.
Time is also criteria to consider as the older you are, the less sense it makes to convert a traditional IRA to a Roth. And the owner will have less time to make up for losses in taxes on the conversion.
Roth can be maintained and passed on the Heirs, this is also an area to be considered and if the owner plans to pass it to the beneficiaries or heirs then converting IRA to Roth is a great solution as this is the only retirement plan that allows this. Other things to consider are that unlike traditional IRAs, Roth’s require no minimum withdrawals during the life of the IRA owner. If the surviving spouse inherits the Roth account, he or she need not take any minimum withdrawals either. With a regular IRA, the owner must begin taking taxable withdrawals from that account after the age of 70 1/2. Secondly, conversion to a Roth will reduce the taxable estate by the amount of income tax paid to convert. This can reduce estate taxes for the heirs.