Convert Your IRA to a Roth IRA

May 5, 2006–Cleveland, Ohio–Congress is currently considering plans to allow holders of Traditional IRAs, even high-income taxpayers, to convert their IRA into a Roth IRA, which allows tax-free withdrawals.

Roth IRA benefits include completely tax-free distributions if the account has been established for five years and the account holder has reached 59 1/2 years old. To convert to a Roth IRA Americans must currently fall below $100,000 Modified Adjusted Gross Income (MAGI).

According to published reports Congress is planning to suspend the current $100,000 MAGI income limit for Roth conversions for one or two years. After a tax payment when converting, Roth IRA holders would benefit with considerable tax savings in later years when making withdrawals. The plan is part of a larger tax bill that could be finalized as early as this week.

Since I’m in such a low tax bracket, I should be making more contributions to my Roth IRA and only after maxing out should I be contributing to my 401k. However, its very convenient to take the money out of my paycheck before I can get to it and I can mix it amongst various mutual funds. Its the easiest solution, if not the most optimal. I atleast took the step of converting my IRA to a Roth IRA late last year. I’ll probably get around to contributing more my Roth IRA but I’m still not a big fan on the stock market. Right now real estate is a better play, though that my change in the next few years.

For those of you that don’t know, a ROTH IRA is a retirement account where you accumulate money that grows tax-free. Unlike a regular 401k or IRA, the withdrawals are completely tax-free. Read this article on Why you should invest in a Roth IRA.

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