Converting traditional IRAs and 401k plan accounts to Roth IRAs is popular because investors like the idea of the Roth account which grows tax free and also allows for tax free withdrawals. Additionally, the Roth does not have mandatory IRA withdrawals at age 70 1/2 as do traditional retirement plans. However, are these advantages sufficiently beneficial for an older individual who has less time to benefit?
All in all retirees are enjoying longer existences these days, a post-retirement Roth IRA rollover 2011 could have advantages for specific investors.
A new Roth IRA rollover for 2011 can benefit a retiree even though the greatest benefit goes to a younger investor who can enjoy the tax free growth of the Roth account for a longer period. Because there are no IRA minimum distribution requirements, Roth IRA funds can be invested for a longer time horizon and thus have more time to do the job. But even for a recent retiree, that can mean your assets could have 30 years in order to produce growth and income.
Nonetheless, you must weigh the benefit of tax-free benefits against the cost of the Roth IRA rollover in 2011 (in terms of the income taxes you must pay on the amount rolled over). Furthermore, a Roth IRA rollover generally works best any time an investor has a longer time horizon for their investment portfolio, which some retirees have, especially those not planning to use the account and leave it to their IRA beneficiary.
Generally, you must only consider a post-retirement Roth rollover if you have assets outside your classic IRA or 401k to pay the income taxes on the converted amount. You need also take into account the following: what is the tax rate (i.e. your current tax bracket) that will apply to the converted amount compared to the tax bracket you will pay on required minimum distributions if you just keep your pre-tax IRA. One of the negative aspects of a conversion is that you most include the amount converted in your current tax return as ordinary income and maybe that added income boosts your IRA tax bracket from say 28% to 35%. Maybe it's better not to convert and make your distributions from your traditional IRA in your retirement years when you are possibly in a 15% tax bracket. Talk to your accountant.
If you convert to the Roth IRA after age 70½, you need to take one last required mandatory distribution from your traditional Individual retirement account for the year in which you perform in the rollover. The remaining assets are designated as your Roth IRA rollover 2011.
Although distributions from a Roth IRA rollover 2011 typically come out tax-free upon retirement, that is not 100% true. While your principal can be withdrawn at any time tax free (because you have already paid tax on it) , withdrawal of earnings are only tax free if done 5 years after the Roth conversion was made.
Lose a Fortune on Your 401k Rollover
If you do not do any of these correctly:
- Opt for a distribution rather than direct transfer
- Rollover company stock to an IRA
- Choose to rollover to a Roth IRA
- Rollover to your new employer’s 401k
- Rollover post-tax contributions