Roth IRA – Convert or Contribute?


Roth IRAs are funded with money that you’ve already paid tax on, and then they grow tax-free. This is different than traditional pre-tax funded retirement accounts. Roth IRAs offer many advantages that other traditional retirement accounts don’t. First, you can withdraw your money tax-free during retirement, which allows you to manage your taxable income. And second, with no annual distribution rules, you’re free to take your money out only when you want to.

There are two ways to put your funds into a Roth IRA; through contributions and conversions. Contribution rules include contribution limits. For several years the annual limits have remained at five thousand five hundred dollars, or six thousand five hundred dollars if you’re over 50. And to contribute money to a Roth IRA, you must earn compensation, or income, but remain below IRS mandated income levels. High earners can’t contribute.

Conversions have very few limitations. Anyone can convert an account such as an IRA, 401(k) or SEP IRA into a Roth IRA. You don’t need to have income, but if you do, there’s no income limit and there are no restrictions on the size of the conversion. You can convert one million dollars if you like! You will, however, owe income tax on any amount that you convert, so conversions should be scheduled when your tax rate is lowest.

To learn more about Roth conversions and contributions, give us a call today.

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