Benefits of an IRA Rollover to Roth IRA
There are many benefits to making an IRA rollover to Roth IRA. The tax benefits of a Roth IRA have long attracted investors to open this type of retirement account. For people who qualify, Roth IRA has become more popular than traditional IRA.
A Roth IRA differs from other types of IRA such as traditional IRA and SEP IRA. A traditional IRA is available for anyone with earned income whereas an investor needs to earn less than a certain amount to qualify to open a Roth IRA. Sometimes, an investor qualifies to open a Roth IRA and then earns too much to contribute later on.
The major benefit of making an IRA rollover to Roth IRA is the fact that with a Roth IRA contributions and earnings are tax free when withdrawn according to Roth IRA rules. Withdrawal amounts from a Roth IRA after 5 year at retirement are tax free. In contrast, withdrawals from a traditional IRA are taxed as ordinary income. This makes investors who care about paying taxes in the future prefer opening Roth IRA.
Contributions to a Roth IRA are after tax contributions. That means if you make an IRA rollover to Roth IRA with pre-tax money then you need to pay tax on that amount of money in the year you roll it over into a Roth IRA. Direct contributions to a Roth IRA may be withdrawn at any time with no tax or penalty because it is already after tax money. This exemption does not apply to rollover amounts.
In the same way as a Traditional IRA, the contribution to a Roth IRA is restricted by the Internal Revenue Code such as $5,000 in 2008. If an investor has more than one IRA, then the total amount of contribution to all IRA including Roth IRA cannot exceed the Internal Revenue Code’s limit.
Even though there are obvious benefits to making an IRA rollover to Roth IRA, some investors prefer to rollover over into traditional IRA because of the tax benefits now. When investors want to pay less tax today, they can put as much money into a traditional IRA as they can afford. Paying tax later is a key incentive for many taxpayers.
