ROTH-IRA CONVERSION Story of Smart Money vs. Beneficial Money

A picture is worth a thousand words. Rules of engagement when we look at doing a ROTH IRA conversion.

You're already smart with your money, now let's look at beneficial money strategy. Living example of why we consider ROTH IRA conversions . Here's a hypothetical snap-shot of the benefits of doing a 'serial' ROTH-IRA conversion. i.e., $20,000 annually converted from a traditional IRA to a ROTH IRA. One big reason for this strategy is the bottom line (see 'Total' once conversion series is completed. Over $154,000 in tax savings).

Let's take a glance at what happens when we have a brand new verses 5 years or older ROTH IRA account in this ROTH conversion story illustrated.

The Key Tax Rule: The 5-Year Holding Period

• Tax-Free Contributions: Withdrawals of the original owner's contributions are always tax-free for the beneficiary, regardless of when the account was opened.  

• Taxable Earnings Exception: Withdrawals of the account's earnings (growth) are taxable only if the Roth IRA was opened less than five years before the original owner's death.  

  • If the five-year period has not been met, any earnings you withdraw are subject to income tax.  

  • If the five-year period has been met, all withdrawals (contributions and earnings) are tax-free.

• Inherited Roth IRAs are generally tax-free for the beneficiary, provided the 5 Year Rules are met.  

• Because the original Roth IRA owner funded the account with money that had already been taxed, withdrawals by the beneficiary (both contributions and earnings) are usually not subject to income tax.

  
  

It is highly recommended to consult a tax professional to ensure you follow the IRS rules for inherited IRAs to maximize the tax-free status and avoid penalties for missed deadlines.

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