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Feds’ New Law Allows IRA Conversions

When it comes to managing your future or retirement (but who’s really retiring these days?), there are still ways to try and grow a financial nest-egg for yourself down the road, despite the harsh economic conditions we are presently living through.

In Washington, the Employee Benefits Research Institute (EBRI) reported more than 75% of US citizens, between the ages of 40 to 59, have less than $100,000 saved for retirement.  Meanwhile, some financial planners have said one should have at least $1 million by the time they reach retirement. 

Well, if we can’t count on social security bringing in a great deal of retirement income and pension plans for that matter, the best we can do is invest wisely, take out an equity line of credit and/or perhaps get a part-time gig somewhere and sock away that money earned.

This is why the recent change in federal law, which governs retirement accounts, comes at a fantastic time.  Now, people can convert IRAs to Roth IRAs; whereas before, those with an adjusted gross income below $100K, were not allowed to transfer retirement accounts.

While the conversion may not be right for some, there are some benefits.  Funds left in Roth grow tax-free, and for a greater period of time than in a traditional IRA, provided one can pay the taxes of the conversion from other funds.  Since money in Roth IRA grows tax-free, when the benefits are taken, it’s taken without being subject to income tax.  As well, there is no age requirement in taking distributions from a Roth as opposed to 70 ½ from a traditional IRA.

On the downside, if you do have a traditional IRA and want to switch to a Roth, you have to face the taxes on conversion.  However, a special provision allows taxpayers to spread the tax cost over two years. 

Additionally, after that tax is paid off, you will never be taxed again.  This is pretty important to note as an individual gets older and wants to reach into their Roth funds.  Imagine that: no more taxes after the initial conversion tax.

If you have been thinking about making the switch, now seems to be the perfect time.  It can only wind up helping you down the road…in reaching the now elusive “retirement.”