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Roth Conversions: Part II Roth Basics

In Part I of the “Roth Coversion Series”, we considered the nuts and bolts of a Traditional IRA. With all the talk of converting to a Roth (In essence moving a Traditional IRA to that of a Roth.), we certainly want to know more about this type of retirement account. What is all the hype about?


A Roth individual retirement account (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 Roth IRA. In addition, individuals age 50 or older can make an extra “catch-up” contribution of up to $1,000 in 2015. Contributions to a Roth IRA are not tax deductible, but the funds grow tax deferred and distributions are tax free under certain conditions.


  • You have taxable compensation (i.e., wages, self-employment income) during the year of the contribution
  • Your modified adjusted gross income (MAGI) for 2010 must be:
    • $116,000 or less for a full contribution if your tax filing status is single or head of household (partial contribution allowed, up to MAGI of $131,000)
    • $183,000 or less for a full contribution if your tax filing status is married filing jointly or qualifying widow(er) (partial contribution allowed, up to MAGI of $193,000)
    • $10,000 or less for a partial contribution if your tax filing status is married filing separately and you lived with your spouse at any time during the year (full contribution not allowed)

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

 Key Strengths

  • Qualified distributions are completely tax free (and penalty free)
  • You can contribute after age 70½ (as long as you have taxable compensation)
  • You have flexibility in withdrawing your funds prior to retirement
  • You are not required to take any distributions while you are alive
  • Contributions can be made even if you are covered by an employer-sponsored retirement plan
  • 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 Tradeoffs

  • You receive no tax deduction when you make a contribution
  • If a withdrawal does not qualify for tax-free status, the portion that represents earnings is subject to federal income tax (and perhaps an early withdrawal penalty if under age 59½)
  • Special penalty provisions may apply to withdrawals of Roth IRA funds that were converted or rolled over from a traditional IRA, SEP IRA, or SIMPLE IRA

How Is It Implemented?

  • Open a Roth IRA with a bank, financial institution, mutual fund company, life insurance company, or stockbroker
  • Select types of investments to fund the Roth 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
  • Roll funds from a Qualified Retirement Account or Traditional IRA at any time

Part III of the Roth Conversion series will compare Traditional IRAs to Roth IRAs.

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