Things to Consider Before You Begin a Roth IRA Conversion

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September 2012

Some people find that a Roth IRA conversion is a good way to get a tax advantage on money currently in a traditional IRA. But before you begin a Roth IRA conversion, there are a few important things to consider.

What is a Roth IRA Conversion?

In a Roth IRA conversion, you convert your funds from your traditional IRA into a Roth IRA. The amount of money you convert is added to your taxable income for the year.

What are the Advantages?

For some, there may be tax advantages when converting a traditional IRA to a Roth IRA. With a Roth IRA, you can make tax- and penalty-free withdrawals of your original contributions at any time. When you reach age 59 or older, any distributions of your Roth IRA earnings are also tax-exempt as long as you made a contribution at least five years before the distribution.

So with a Roth IRA conversion, you're essentially deciding to pay tax on your funds now, so your future distributions will be nontaxable.

Is It Right for Me?

Whether a Roth IRA conversion is right for you depends on a number of factors. It's a good idea to check with your tax professional to discuss if a conversion is right for you. With that in mind, here are a few things to consider:

  • Your age - It may become less of a good choice to do a Roth IRA conversion as you get closer to retirement. In the "pretirement" window, you'll simply have less time to make up for what you lose when you pay taxes at the time of the conversion.
  • Current tax benefits - The income you report from your conversion could push you into a higher tax bracket, which could also exclude you from other tax benefits, such as child and higher-education tax credits.
  • Income after retirement - If you'll be in a lower tax bracket when you retire than you are now, the income tax on your IRA distributions will be lower at that point than the tax rate you'd pay on a Roth IRA conversion today. Instead of converting, it might make more sense to wait, let the money compound in your regular IRA, and then pay taxes at your lower retirement-income tax rate.
  • Inheritance Plans - With a Roth IRA, there's no required minimum withdrawal during the life of the IRA owner. As a result, the entire balance of the account may be passed to your beneficiary. By contrast, you usually have to start taking distributions from your traditional IRA when you turn 70 any distributions you don't really need could mean less money for your heirs.

How Ally Bank Can Help

If you're interested in learning more about a Roth IRA conversion, you can speak with a live Ally Bank customer care representative anytime, 24/7 by calling 877-247-ALLY (2559).

You can also visit AllyBank.com to learn more about our IRA products. Safeguard your retirement savings with the stability of an Ally Bank IRA CD or IRA Online Savings Account - both are FDIC-insured up to the maximum amount allowed by law. Plus, you can earn interest rates that are consistently among the most competitive in the country.

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