Tax Rules:Roth IRA Conversions, IRA Insurance Protection & Lawsuits

There is an exception to the tax rules when converting. If an individual made nondeductible contributions to their traditional IRA, this amount will not be taxed. If the person has made significant contributions that are nondeductible, converting to a Roth IRA will have enormous benefits. An easy deciding factor is whether an individual has the money available to pay the taxes that will be due. If they do, then the conversion is probably beneficial. If not, the individual may want to reconsider the conversion.

After making sure eligibility requirements are met, many people will still ask why they should convert to a Roth IRA. IRA retirement income is a huge asset as workers near the age of retirement. These accounts, regardless of the type, will provide an extra source of income.

What is a Roth IRA: Comparing to Traditional IRA

To understand why a Roth IRA can be more beneficial, individuals should be able to answer the common question of “what is Roth IRA?” The Roth IRA is an individual retirement account that has benefits over other IRA accounts. The overall structure of a Roth IRA is similar to other IRAs. The main difference is that contributions are made after taxes. This means that taxes have already been paid on the amount being contributed. The positive side to this is that when withdrawals are made after the age of 59 ½, there will be no taxes included, making a Roth IRA a form of tax-free income. Another key benefit is that there are no mandatory required withdrawals. When comparing a Roth vs. traditional IRA, these are the main differences. Roth IRA accounts also allow individuals to keep contributing after they retire. Roth IRA contribution limits are the same as a traditional IRA. These three main points are what makes a Roth more attractive for many people. In most situations, a Roth IRA will provide the most benefits and will be a definite source of income after retirement.

IRA & Retirement Plan Investing

IRA and retirement plan investing is one of the most important decisions anyone can make. This decision will provide the basis of your retirement savings. There are many ways to save for the years to come, but IRA accounts are the safest and easiest way to assure there will be an income source upon retiring. If possible, it may be best to begin with a Roth IRA so there will be no need to convert later. However, a conversion to Roth is not the only option. In some cases, people opt to convert their current Roth IRA to a traditional IRA. This can occur when an individual receives a significant pay increase. If they no longer meet the Roth IRA limits regarding income, they will not be able to contribute to the account any longer. In this situation, converting to a traditional IRA will allow contributions to resume.

Recently, many people are concerned about the financial safety of their IRA accounts. It should be noted that IRAs are considered a source of income. This being said, these accounts may be included in lawsuits and bankruptcy claims. There is some question whether Roth IRA accounts are protected in the same way as traditional accounts. If the account has a large amount of money, it may be deemed an asset and subject to legal findings. If there is any concern over the safety and protection of a Roth IRA, consult with a tax professional. Call us toll-free at (888-938-5872) for a free, initial and private consultation regarding protecting your Roth IRA accounts and any assets you hold.

IRA Insurance Protection

Currently, ERISA, SPIC, and FDIC offer different levels of IRA insurance depending on where the funds sit for general liability if a financial institution goes belly up, but not for market-related volatility. Generally, this insurance will only cover the amount of the account in CD's and Money Market accounts. This insurance is applicable to traditional IRAs. It has not yet been determined if Roth IRA accounts will fall under this insurance coverage. With regards to creditors, many states offer some level of creditor protection to regular IRAs and 401(k)'s – although not completely protected.  The bankruptcy laws from state to state vary and need to be considered. If you are in a high risk profession, these should be a consideration when establishing your IRAs.

Converting an IRA account is a serious decision. It is important to review all IRA rules, including the simple IRA rules as well as IRA withdrawal rules. Take the time needed to compare the pros and cons of each type of account. An IRA account is the main source of income for many retired individuals. A conversion may be a good choice for many who wish to receive tax-free income after they retire.

Assumptions on the Roth IRA Conversion

This article is based on several assumptions including the length of keeping your money in the Roth IRA. If you do not plan on keeping your money in the account long enough to offset the challenges with the conversion, the assumptions may be inaccurate for your situation. You should always consult a tax expert. Please call us today and we'll help you through these tough decisions and assess your best avenue for success.