Many investors make an IRA rollover to Roth IRA because they are attracted to the tax benefits of Roth IRA distributions. Roth IRA is not the same as Traditional IRA and other types of IRA and while it is more complicated to understand, once investors understand how a Roth IRA works, they usually prefer it to a traditional IRA if they qualify to open a Roth IRA.
A Roth IRA is a type of individual retirement account that investors can open in the same way as the traditional IRA. However, while an investor can qualify for a traditional IRA with just earned income, the amount of earned income matters when opening a Roth IRA. Some investors do not qualify to make an IRA rollover into Roth IRA and have to just open traditional IRAs.
Investors who make an IRA rollover into Roth IRA love the tax benefits that accompany Roth IRA. Contributions and earnings in a Roth IRA are tax free when withdrawn after 5 years and when the owner is 59. In comparison, withdrawal of earnings from a traditional IRA are taxed as ordinary income. Investors who think that they will be in higher tax bracket in the future prefer to pay tax now and invest in a Roth IRA.
While traditional IRA contributions are tax deductible, contributions to a Roth IRA are made with after tax money. When you make an IRA rollover into Roth IRA, your rollover must be after tax assets. If you have not paid taxes on that amount that you want to rollover, you will end up with a tax bill at the end of the year for the rollover.
Contributions to a Roth IRA are restricted in the same way traditional IRA contributions are. According to the Internal Revenue Code and the IRS, investors can contribute the same amount to a Roth IRA as the can to a traditional IRA. In 2008, the contribution limit, not including catch up contribution, is $5,000. No matter how many IRA accounts you have the limit for all of them combined is $5,000.
Even though there are obvious benefits to making an IRA rollover to Roth IRA, some investors prefer to rollover over into traditional IRA because of the tax benefits now. When investors want to pay less tax today, they can put as much money into a traditional IRA as they can afford. Paying tax later is a key incentive for many taxpayers.
Author: Frank ParnelliThis author has published 1 articles so far.