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Converting to a ROTH IRA from a traditional IRA may provide an excellent opportunity to build additional financial resources for your retirement years. David Nilssen, the Director of Corporate Development for Guidant Financial Group indicates, “The ROTH is a tremendous wealth building tool. In many cases, a person who uses the ROTH to invest with post tax dollars is much better prepared for retirement than the individual who does not.”

If qualified, deducting your traditional IRA contribution allows for an immediate tax benefit. Traditional IRAs are taxed at the individuals current income tax bracket when withdrawn. A 10% penalty may apply if these withdrawals are made before the age of 59 1/2. Conversely, Roth IRA contributions, provided the investor follows specific government regulations, are paid with after tax dollars and will never be taxed again. All profits earned inside a Roth IRA accrue tax free for retirement. While the limits, without paying an additional tax, are identical at $3,000 per year ($3,500 if you are over the age of 50), the net difference at retirement could be much greater.

There are many reasons why you may wish to consider converting from a traditional IRA to a Roth IRA.

  • No mandatory distributions (Investors are not required to take withdrawals from their Roth IRA at 70 ½ as with Traditional IRA's)

  • No tax on gains when withdrawn

  • Investment prices (If you think investments are undervalued now, then purchasing them in a Roth IRA provides that you will not have to pay tax on the gain)

A ROTH IRA conversion may be done with all or a portion of your account. Upon converting you will be responsible to pay taxes on the traditional IRA. It is advantageous to pay these taxes through a different account. This is due to the fact that if you pay the taxes out of an IRA and are less than 59 ½ years of age, you will owe at least a 10% early withdrawal penalty on that amount and could be subject to additional income tax.

If you are thinking of converting to a ROTH IRA, professional advice should always be sought. Before a decision is made, think carefully about your current and expected retirement tax bracket, age, and expected returns. In most cases, the higher you expect your returns to be, the more attractive the ROTH option looks. Remember to ask your financial advisor or CPA to discuss with you the different factors which should betaken into account when making this important decision.