In the year 2010, you will be getting an opportunity to save a tax free retirement income if you convert your individual retirement account into a Roth IRA. Apart from this, the IRS is allowing the taxpayers a time period of 3 years to pay taxes due on a conversion. Apart from this, even the higher-income taxpayers will be able to set up Roth IRAs which was not allowed earlier.
Here are the 7 things that you should keep in mind while you convert your individual retirement account into a Roth IRA:
1. Evaluate your IRA and 401(k)
You'll have to decide as to which of your assets qualifies for conversion into a Roth IRA. Any asset that you have in your traditional IRA, is eligible for a conversion into Roth IRA. However, you should note that if you've a non-deductible IRA contributions, then it won't be taxed while you make a conversion. If you have a 401(k) or 403(b) from your previous employer, then you can directly convert those assets into a Roth IRA.
2. Take help from the experts
You can take the help of your tax professional or financial adviser while you try to convert your IRA into a Roth IRA . Free online consultations are also available in this regard. You can go for them if you do not want to consult a tax professional.
3. Check out for various tax factors
There are various factors which you should keep in mind while opting for a Roth IRA conversion. These include:
- Age.
- Present tax bracket.
- Time you have before your retirement.
- Your need to use the money.
You should remember that the higher your tax bracket is, the more you'll have to pay on your Roth IRA conversion.
4. Calculating tax dues
You can calculate your tax dues on the time at conversion quite easily. Unless you've made any non-deductible contributions, you will be owing taxes on your entire value of IRA. If you've made any non-deductible contributions, then you'll have to subtract it from the total IRA account balance.
5. Right time to pay the taxes
You should decide whether you want to pay the taxes in 2010 or spread it over to the next 2 years. This will depend upon the consistency of your tax situation. If you do not have to pay any capital gains taxes, then there are less chances that you would have to pay huge taxes. In that case, you can spread the taxes over the next 2 years.
Tax advisers opine that for a Roth conversion, you should be able to pay taxes from your income or from any other source. You should not take out funds from your IRA to pay the taxes. This is because you would be responsible for paying interests and penalties on IRA funds that you take out to pay the taxes.
6. Right time for Roth IRA conversion
It would be a good option to convert the IRA in the early 2010. This will help you in getting as much gain as possible from the tax-free growth that a Roth offers. In case, you're not sure about your income and your tax bracket, then it would be better to wait till the second half of 2010.
7: Fill out conversion paperwork
It's easy to fill out the Roth IRA conversion papers. You should check out what your nondeductible contributions are from your income tax forms on Form 8606, Nondeductible IRAs. Apart from this, you'll need to let the holder of your IRA account i.e. the mutual fund, bank or other financial institutions, know certain information such as:
- The name of the beneficiary who'll receive the money upon your death.
- Information regarding investment of your converted assets.
- Whether you intend to pay the taxes or want the custodian to withhold the amount from the IRA's assets and pay them.