The Roth IRA: What a Great Deal!

The new Roth IRA is a way for taxpayers to save and invest their money for the future. They can put in a few thousand to millions of dollars and the money grows tax-free. When they take the money out, they don’t have to pay taxes on it, as long as the account has been open for at least five years and they’re older than 59½. There are two ways to put money into a Roth IRA – by making regular contributions or by moving money from a traditional IRA. However, there are rules about who can do this based on their income. If someone’s income is normally over $100,000, they may need to plan ahead and try to lower their income for the year to qualify. This could include things like investing in tax-free bonds or putting off taking money they’ve earned until the next year. The issue is whether a taxpayer who is already receiving payments from their traditional IRA can roll over their minimum required distribution (MRD) to a Roth IRA. The law says that a rollover from a traditional IRA to a Roth IRA can be done, but it specifically prohibits the rollover of the MRD. This means that the MRD cannot be rolled over and will be counted towards the taxpayer’s income. This could affect the taxpayer’s eligibility for certain tax benefits. The law doesn’t specifically say whether people with large IRAs can convert to a Roth IRA. The authors think Congress created the Roth IRA to make money, so they probably didn’t intend for the rules to stop people from converting large IRAs. Also, the law doesn’t say if you can directly convert from a work retirement plan to a Roth IRA, but you can do it indirectly by rolling over the work plan into a traditional IRA first. There needs to be clearer guidance from the IRS on this. A Roth IRA allows you to take out money without paying taxes if certain conditions are met. If you take out money early, you may have to pay taxes and a penalty. However, the money you put into the Roth IRA can be taken out without taxes or penalties at any time. After you take out all the money you put in, then you have to pay taxes and penalties on any additional money you take out. This rule applies to all Roth IRAs you have. During the owner’s lifetime, there are no required minimum distributions from a Roth IRA, so the owner doesn’t have to take out any money. After the owner’s death, the beneficiaries can take out the money tax-free, or they can choose to keep the account and continue getting tax-free growth. There are complicated rules for calculating minimum distributions after the owner’s death, but it’s not completely clear how they apply to a Roth IRA. We’ll need more guidance from the IRS on this. The most important question when deciding whether to convert a traditional IRA to a Roth IRA is: “Should the taxpayer convert?” The answer depends on the individual’s circumstances. Converting to a Roth IRA could provide tax-free accumulation of funds, but it also requires paying income tax on the withdrawal from the traditional IRA. It’s a big financial decision that could impact a lot of money, so it’s important to analyze the numbers and consider the individual’s situation. It’s also important to consider the post-death payout options for the Roth IRA if it’s being used for estate planning. T and W need to decide whether to convert T’s traditional IRA to a Roth IRA. They have a $5 million estate, with $1 million in the IRA and $4 million in other assets. They can earn 8% in the IRA and 5.5% on other assets. T is 68 and W is 63, with one child, C, who is 37.

If they stick with the traditional IRA and pay a 22% income tax, their family will get $2,362,400. If they pay a 28% income tax, they’ll get $2,198,400.

If they convert to a Roth IRA and pay a 40% income tax, their family will get $1,320,000 after converting the IRA and paying taxes from other assets.

So, it’s better for T and W to stick with the traditional IRA and pay the 22% income tax. Converting a traditional IRA to a Roth IRA can be beneficial for your family, especially if you expect to be in a higher tax bracket when you retire. However, it’s not always the best choice, especially if your retirement account is a large part of your total savings. In general, it’s not a good idea to convert to a Roth IRA if you’ll have to use money from your retirement account to pay the taxes on the conversion. The Roth IRA was created in 1998 and allows taxpayers to spread the income from converting a traditional IRA to a Roth IRA over four years. This can be a good deal for some people, but it’s important to do the math to see if it’s worth it.

Source: https://www.floridabar.org/the-florida-bar-journal/the-roth-ira-what-a-great-deal/