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Benefits of a Roth IRA Conversion

Roth IRA Conversion

What is a Roth IRA Conversion?

A Roth IRA conversion is generally the process of converting a 401(k) plan or Traditional IRA to a Roth IRA. Retirement investors employ this tactic because they want to spend as little as they have to on taxes, however their income exceeds that of the Roth IRA income limits.

Below are a few important considerations to make if you decide to convert your Traditional IRA to a self-directed Roth IRA.

  • Can you pay income taxes on the money you convert from a Traditional IRA?
  • Based on your income tax bracket, does it make sense to pay the entire tax due this year? If the rate goes up, you should consider a Roth IRA conversion. If you think it will go down, they you should reconsider.
  • Do you anticipate withdrawing Roth IRA funds for personal expenses within five years of conversion? If so, you may face tax and penalties if you make a withdrawal if the Roth IRA has not been open for five years or more.

Advantages

The main advantage of the Roth IRA over a Traditional IRA is that, if you qualify to make contributions, all distributions from the IRA are tax-free. Furthermore, unlike traditional IRAs, you may contribute to a Roth IRA for as long as you continue to earn an income. However, with a traditional IRA , you can’t make any contributions after you reach age 70 1/2. As a result, a Roth IRA conversion is one way to fund the account.

Self Directed Traditional IRA vs Self-Directed Roth IRA

Self-Directed Traditional IRA

Self-Directed Roth IRA

Tax deductible contributions

In this case, contributions are not tax deductible – in other words, contributions to a Roth IRA are from tax dollars

Distributions may be taken by age 59 1/2 and are mandatory by age 70 1/2

Unlike traditional IRA, there’s no Mandatory Distribution Age. Therefore, there’s no requirement to take distributions

Taxes are paid on the amount of distributions (10% excise tax may apply if you withdraw prior to age 59 1/2)

Conversely, there are no taxes on distributions if you follow rules and regulations

Available to everyone; no income restrictions

  • In contrast, Roth IRA is available to single filers, Head of Household or Married and Filing Separately (if you didn’t live with your spouse that year). Modified adjusted gross income is $122,000. These groups can make a full contribution. But you can’t make a contribution if your adjusted gross income is greater than $137,000.
  • Joint filers with modified adjusted gross incomes up to $193,000 can make a full contribution. Again, it’s phased-out starting at $193,000. So you can’t make a contribution if your adjusted gross income is greater than $203,000.

Use funds to purchase a variety of investments (stocks, real estate, precious metals, notes, etc.)

Again, use funds to purchase a variety of investments (stocks, real estate, precious metals, notes, etc.)

IRA investments grow tax-free until distribution (tax deferral)

Earnings and principal are 100% tax free if you follow rules and regulations – No tax on distributions – maximum tax-deferral

Income/gains from IRA investments are tax-free

Again, income/gains from IRA investments are tax-free

If you purchase real estate property and take possession of the property after 59 1/2, you’re subject to tax

Whereas, if you purchase a domestic or foreign real estate property, then taking possession after 59 1/2 is tax-free

Get Started

Surprisingly, a Roth IRA conversion is easy to do. Whenever you’re ready, An IRA expert from the IRA Financial Group can help you fund your Self-Directed Roth IRA LLC with traditional IRA or 401(k) funds. Convert now to experience the Roth IRA advantage!

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