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Roth IRA vs other types of IRABetween 2000 and 2009, there was a 6.2% spike in households that owned Roth IRAs every year on average – the biggest spike of any types of IRAs. That makes you wonder: what’s so great about a Roth? What makes the Roth a good choice? Two things distinguish the Roth IRA from other types of IRAs. First, the income you draw from a Roth is tax-free. This is money that you already paid income tax on while you were working. Another thing, though, is that it is exempt from required minimum distribution rules. The best way to fund a Roth is simply to convert a traditional IRA or employer sponsored retirement account into a Roth.

Now, a Roth IRA conversion, as the above transaction is called, is complicated in practice and if you make mistakes, you can lose some of your key tax advantages to owning a Roth. When you convert tax deferred retirement funds into a Roth, you must report the transferred funds as income for the year in which the conversion takes place and you have to pay the taxes owed. It’s generally not a good idea to pay for these taxes out of your retirement funds unless you over the age of 55.

Another mistake is to neglect re-characterization of the account if the account was not as valuable after conversion. If the value dropped after you converted to a Roth, you can reverse course by using a process called re-characterization. This enables you to amend the tax return and obtain a refund on the taxes paid on the conversion.

Key Tip: Do not file at the five year rule. What’s great about this strategy is that you can then reconvert later in a lower tax bracket. You’ll have to wait at least thirty days after you filed the re-characterization, preferably after October so that it will be applied to the following tax year.

Let’s discuss where you are financially and how I can help you “avoid cracking your nest egg”. Contact me at (866)471-7233 for a no-obligation, free consultation.