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Roth IRA can have tax advantages

Fraser Horn and Dudley IrwinVail, CO, Colorado

The Roth IRA can be an exciting option for your retirement savings. Contributions to this account are all made on an after-tax basis. Your withdrawals from a Roth IRA are tax-free if holding-period and age requirements are met. This special type of IRA is not subject to minimum distribution rules based on age. All accumulations can be passed to your heirs free of income tax.While this may seem like an interesting option, the decision to convert is not as simple as it may seem. You need to consider the following to make the right decision:Current adjusted gross income.Current IRA balances.Your and your beneficiaries ages.Your current income tax rate.Expected rate when funds are withdrawn from the IRA.When IRA withdrawals will be legally or financially required.The investment return you expect on IRA assets.Your overall financial situationThe potential advantages of the Roth IRA are well worth the required analysis for many eligible investors. your Financial Adviser can help you evaluate whether its appropriate for your unique situation.Conversion to a RothYou may be eligible to transfer the assets in the traditional IRA into a Roth IRA if you have funds in a traditional IRA (which may be wholly or partly deductible).Moving funds from a traditional IRA to a Roth IRA is taxable. The future tax-free withdrawals from a Roth IRA more than offset the taxes paid up front for many taxpayers. EligibilityYou must have an adjusted gross income of $100,000 or less (not counting the income created by the conversion) in the year the conversion takes place to be eligible to convert. The same limit applies for single individuals and for married couples filing jointly. Qualifying to transfer funds to a Roth IRA may require careful income planning. You will want to wait until the last quarter of the year when your income can be more accurately estimated if you want to convert but are uncertain about your total income for the year.Conversion DecisionWhether to convert a traditional IRA into a Roth IRA can be a difficult decision, since the transfer may generate a large amount of income tax. There is clearly value to the conversion to a Roth IRA after the five-year holding requirement is met if you expect to pay about the same tax rate today (to transfer to a Roth IRA) as you would pay in the future (on withdrawals from a tax-deferred IRA). The decision becomes more difficult if your tax rate on future IRA withdrawals would be significantly lower than todays rate.Using IRA funds to pay income taxes often removes most of the advantages of the Roth IRA conversion, so its important to be able to pay the tax from other sources.The attraction of a traditional IRA has always been the ability to defer income taxes until withdrawals were taken. By contrast, in exchange for the up-front payment of income tax, the Roth IRA offers tax-free withdrawals in the future. The longer you can leave the assets in the Roth IRA, the greater the potential benefit.The greater the accumulations are in the Roth IRA, the greater the value of the eventual tax-free withdrawals.It will not be possible to convert only after-tax dollars from your traditional IRAs to a Roth IRA and continue to defer taxes on existing before-tax dollars in your traditional IRAs. While partial conversions are allowed, the taxation of any IRA distribution will be based on the relationship between total IRA balances and after-tax dollars in all your IRAs combined. An example would be if your total non-deductible IRA contributions represent 20 percent of your total current traditional IRA balances, 20 percent of any current distributions will be non-taxable.The income reported from the conversion may cause additional Social Security benefits to become taxable in the year of the conversion. However, after the conversion, you may find it easier to avoid tax on Social Security benefits, since Roth IRA withdrawals will probably not be included in calculating tax on these benefits.WithdrawalsDistributions of contributions from a Roth IRA are generally tax-free and penalty-free and can be taken at any time. Distributions from a Roth IRA conversion, prior to the expiration of a 5-year holding period are subject to a 10 percent penalty, unless you meet one of the exceptions listed below.Exceptions include: Distributions due to death, disability, eligible life expectancy payments, eligible medical expenses, certain unemployed individuals health premium, limited first-time home purchase, qualified higher education expenses, or IRS levy.The Roth IRA imposes no requirements for distributions due to age. Unlike the traditional IRA, which requires minimum distributions beginning at age 70, no withdrawals are ever required from the Roth IRA until the death of the owner. This may make the Roth IRA an ideal tool for estate accumulation and estate planning.Since Roth IRA balances can be withdrawn without income tax, they can be much more effective for funding a bypass or credit shelter trust. The transfer to the trust will not generate any income-tax liability.The accuracy and completeness of this material are not guaranteed. The opinions expressed are those of Fraser M. Horn and Dudley M. Irwin and are not necessarily those of Berthel Fisher or its affiliates. The material is distributed solely for information purposes and is not a solicitation of an offer to buy any security or instrument or to participate in any trading strategy. Provided by courtesy of Fraser M. Horn and Dudley M. Irwin, Investment Adviser Representatives with Berthel Fisher in Edwards. Registered Representative of and securities offered through Berthel Fisher & Company Financial Services, Inc. Member FINRA/SIPC. 1st & Main Investment Advisers is independent of BFCFS.


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