Seemingly every financial institution and advisor want you to consider a Roth Conversion. Well… anytime I hear the word “Conversion” I think of a religious principle that I learned about as a child. In fact, the “Roth” is mainstream, and has been on the scene since the summer of 1977. And as you will see in later posts on the subject, you are permitted to “Unconvert”. In Part II of this series, we will look into the details of the Roth, and in Part III compare the Roth to a Traditional IRA. Subsequently we will look at pros and cons of converting a regular IRA to a Roth IRA.

Before making the decision To Convert or Not To Convert, we must know exactly what we have and what we will be getting. If you own or are considering a Traditional (Regular) IRA, here is some basic information regarding this type of retirement account.

Definition

A traditional individual retirement account or individual retirement annuity (IRA) is a personal savings plan that offers tax benefits to encourage retirement savings. You can contribute up to the lesser of $5,000 in 2015, or 100 percent of your taxable compensation to a traditional IRA. In addition, individuals age 50 and older can make an extra “catch-up” contribution of $1,000 in 2015. Funds in a traditional IRA grow tax deferred until they are withdrawn. Contributions may be fully or partially tax deductible, depending on certain factors.

Prerequisites

• You have not reached age 70½ during the year of the contribution
• You have taxable compensation (i.e., wages, self-employment income) during the year
• You can deduct the full amount of your contribution provided that you are not covered by an employer-sponsored retirement plan
• If you are covered by an employer-sponsored retirement plan, your IRA deduction (if any) depends on your modified adjusted gross income (MAGI) and your federal income tax filing status. You will be entitled to a partial deduction in 2015 if your MAGI is less than:
  • $71,000 if your filing status is single or head of household (less than or equal to $61,000 for a full deduction)
  • $118,000 if your filing status is married filing jointly (less than or equal to $98,000 for a full deduction)
  • $10,000 if your filing status is married filing separately (full deduction not available)

Note: These income ranges are for the 2015 tax year, and are indexed for inflation.

 Key Strengths

• Deductible contributions are made on a pretax basis
• Funds in traditional IRAs grow tax deferred until they are withdrawn
• IRAs offer a wide range of investment choices
• $1,000,000 (and in some cases more) of IRA assets are protected in the event of bankruptcy under federal law

 Key Trade-offs

• Your ability to deduct contributions may be reduced or eliminated if you are covered by an employer-sponsored retirement plan.
• Funds you withdraw from a traditional IRA are taxable income in the year received (to the extent that the withdrawal consists of deductible contributions and investment earnings).
• Withdrawals taken before age 59½ may be subject to a 10 percent premature distribution tax (subject to certain exceptions).
• Minimum annual withdrawals are required when you reach age 70½ (required minimum distributions).
• Taxable portion of distributions will be taxed at ordinary income rates even if funds represent long-term capital gains or dividends paid on stock held within the IRA.

 How Is It Implemented?

• Open an IRA with a bank, financial institution, mutual fund company, life insurance company, or stockbroker
• Select types of investments to fund the IRA (e.g., CDs, mutual funds, annuities)
• Make contributions up to the due date of your federal income tax return for that year (usually April 15 of the following year), not including extensions
• Rollover funds from a Qualified Retirement Plan into an IRA.