Investing is tricky and typically we are looking for the best return which often means moving money along the way. The IRS has always allowed certain individuals to convert their Traditional IRAs to Roth IRAs as long as they met specific qualifications and paid income tax on the conversion. If Roth IRAs are held long enough, the distributions are tax-free, meaning you may never have to pay tax on the earnings. This factor alone makes many taxpayers consider rolling their traditional IRA contributions over to a Roth IRA. While you certainly can do this, it’s important to note that the rules for rollover contributions differ from the rules for making regular contributions to a Roth account.
Following are a few guidelines. Who can make rollover contributions? Anyone, no matter the filing status or modified adjusted gross income (MAGI), is eligible to roll over a traditional IRA and certain employer accounts to a Roth IRA. How much can you roll over? There is no limit. The rollover can come from one or more accounts and contain both deductible and nondeductible contributions. When can you make a rollover? There is no “grace period” in which to make a rollover. Unlike Roth IRA contributions that can be made until the due date of the return, a rollover cannot be made retroactively. Therefore, the amounts rolled from a traditional IRA to a Roth IRA during the tax year are accounted for on the tax return for that tax year. How are contributions taxed? Deductible contributions from a traditional IRA that are rolled into a Roth IRA are generally taxed in the same year the rollover occurs. The nondeductible amounts are rolled over into a Roth IRA tax free. There are plenty of other special rules that apply to rollovers to a Roth IRA, and many sites that give details. It is best to talk to your financial advisor, but for a bit more detail check out this site.
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Pat Kolodziej
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August 2018
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