The Bee's Knees 

If you're looking for a great way to save for retirement, a Roth IRA may be the solution. A person can tuck away $6,000 a year (plus another $1,000 if they are age 50 or older) and the earnings will grow tax free. Not to mention, most custodians allow Roth IRA dollars to be invested in an incredibly wide variety of options.

Roth IRAs have no RMD’s at age 70 ½? What about age restrictions on who can contribute? You’re telling me that anyone can contribute to a Roth IRA as long as they have earned income and do not exceed certain income limits? Grandma Betty who is 78 and works part-time at the local bookstore can contribute to a Roth IRA? You bet she can. And when Grandma Betty passes her Roth IRA to her grandchildren, those kids will inherit tax-free dollars. What a fantastic account!

But tread lightly, my friends.

Maybe you started your Roth IRA with a contribution. You walked into the local bank and proudly handed over $6,000. But then later in the year you hit a big sales target at your company and earned a sizable bonus. Now you make too much money. Once you exceed the income limits you are ineligible for a Roth. You can recharacterize your Roth contribution to a traditional IRA, but you better get it done before October 15 of next year. Otherwise, it will be an excess contribution and a 6% penalty will apply.

Another way to establish a Roth IRA is to convert all or a portion of an existing traditional IRA. This conversion is final. There is no going back, no way to recharacterize a conversion like you can with a contribution.

In addition, be sure to consider ALL of your IRAs before you dive into the Roth conversion pool. Don’t play games and attempt to convert only the basis in one of your traditional IRAs. The abrasive pro rata rule dictates that all IRA, SEP and SIMPLE dollars must be accounted for. If you leap before you look, an unexpected tax bill resulting from your Roth conversion could be smirking at you in the spring.

As for the taxes due on a Roth conversion, it would be a good idea to pay those from assets other than IRA dollars. Once IRA dollars float away to the IRS, they are forever gone and have no ability to grow tax free in your Roth IRA. As for anyone under age 59 ½ who wants to convert to a Roth and pay the taxes with IRA dollars – don’t do it. The taxes you send to the IRS for the conversion never actually get converted. They are considered a withdrawal and face a 10% early distribution penalty. One-two punch.

One final item to take into consideration – is a charity your beneficiary? It is suggested you not leave the charity your Roth IRA. Find something else to give them – like maybe a traditional IRA. Charities don’t pay taxes, so a traditional IRA donation will be just as appreciated. If you convert a traditional IRA to a Roth and pay taxes on the conversion yourself, give someone who would otherwise have to pay taxes on an inheritance your tax-free money. Eating the conversion taxes yourself and then giving the Roth IRA to a charity makes little sense.


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