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Answers to Your Tax Questions


By Wayne M. Davies
Contributing Writer
Article Date: 03.11.03


Hi Wayne,

I understand that you can roll over an IRA to another IRA (within 60 days) without any problems.

My question is ...can you roll over a traditional IRA into a Roth IRA the same basic way?

Thanks

Steve Jacobson
sjacobson@stevejmd.com

Hi Steve,

In typical tax fashion, the answer is a qualified "Yes."

Transferring a Traditional IRA to a Roth IRA is also known as a Roth IRA "conversion." There are 2 requirements for a Roth IRA conversion:

1. Your income must be less than $100,000
2. If you file Married Filing Separate, you and your spouse must not live together for the entire year.

So qualifying for the conversion isn't that difficult -- but here's the important point: be aware that the conversion amount is considered taxable income in the year of the conversion. Depending on the conversion amount and your tax rate (federal and state), you could end up with a big tax bill.

The trade-off is the long-term tax benefits of the Roth IRA: assuming you keep the Roth IRA intact for 5 years and you begin withdrawals after age 59 1/2, then all Roth withdrawals are tax-free. Withdrawals from a Traditional IRA are not tax-free. This distinction is the main attraction of the Roth.

I advise you to "crunch the numbers" before doing the conversion; make sure you know the immediate tax consequences before making a decision.

Sincerely,
Wayne


About the Author:
Wayne M. Davies is author of the new eBook, "The Tax Reduction Toolkit: 29 Little-Known Legal Loopholes That Will Reduce Your Taxes By Thousands (For Small Business Owners and Self-Employed People Only!) Don't file another tax return until you visit: http://www.YouSaveOnTaxes.com/toolkit.html



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