Various benefits exist for persons saving for retirement using traditional IRA to convert their traditional Individual Retirement Arrangement to Roth IRA. From the year 2010, restrictions for converting a traditional IRA to a Roth IRA were eliminated. There are many compelling benefits of a Roth IRA the biggest being the tax considerations.
Tax Free withdrawals
All contributions to a Roth IRA can be withdrawn tax free at any time based on meeting specific criteria. This is different from traditional IRA where withdrawals are treated as ordinary income and are taxed.
Another advantage of the Roth IRA is that the contributions to an IRA scheme can be done even when the owner also participates in another qualified retirement scheme such as the 401(k). The contributions are usually acceptable in traditional IRA but are not excused from taxation.
Roth IRA distributions normally don’t increase the Adjusted Gross Income of retiree meaning that these distributions are free from income tax deductions while at the same time increasing the marginal income tax bracket of the individual. Distributions from traditional IRA are considered as income and so attract tax and can cause the gross income to be taxed in a higher marginal tax bracket.
When the traditional IRA is converted to Roth IRA, the available money is available for withdrawal up to the total amount converted without incurring a penalty. This is possible as long as the five years seasoning period has passed for the converted funds.
Not only can the Roth IRA be transferred on to the heirs, but additionally, if the Roth IRA owner passes on, the spouse becomes the sole beneficiary of both the Roth IRA, even though the spouse owns a separate Roth IRA. The spouse is also allowed to convert the two Roth IRAs with no penalty.
No Tax Rate Hikes
Many people are worried that the financial woes in the United States can result in forced raise taxes. The Roth IRA allows retirees to enjoy prevailing tax rates at the time of the application of the Roth IRA. If taxes are raised in the future, the Roth IRA would not be affected as only the initial investment will be taxed.
Finally, for estates that are large enough to be considered for estate taxes, a Roth IRA can reduce the estate taxes because the tax dollars have been subtracted. This is different for a traditional IRA that is valued at the pre-tax level for estate tax.