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Categories: General Tax Terms

Roth IRA Conversion

A Roth IRA Conversion is the process of transferring funds from a traditional IRA or other eligible retirement accounts into a Roth IRA. This conversion involves paying income taxes on the amount converted in the year of the transfer, as traditional IRAs typically consist of pre-tax contributions and tax-deferred growth.

The primary advantage of a Roth IRA Conversion is that once the funds are in a Roth IRA, they can grow tax-free, and qualified withdrawals during retirement are also tax-free. This strategy can be particularly beneficial for individuals who anticipate being in a higher tax bracket in retirement or for those who wish to leave tax-free assets to heirs.

For example, if an individual converts $50,000 from a traditional IRA to a Roth IRA, they would need to report that amount as taxable income for the year of the conversion. Consequently, if they are in a 22% tax bracket, they would owe $11,000 in taxes on the conversion. After conversion, any earnings on that $50,000 can grow tax-free, and withdrawals made after age 59½ and after the account has been open for at least five years will not incur taxes.

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