Roth vs traditional Ira rollover – A roth vs traditional ira rollover has been a topic of discussion for sometime now.People who have invested in traditional iras find it cumbersome and unworthy to shift to a different plan.Choosing between a Roth IRA and Traditional IRA upto a certain extent is a matter of how you spend and live.
Going a little deeper,investing in a retirement plan shows your personal outlook and perception of money.From the two individual retirement accounts,its only a case of “pay now or pay later”.Though a majority of taxpayers opt for a traditional ira so that they can defer payment of taxes at a later stage,the concept of save now and pay later may not always be the best.
Two phrases that must be understood and kept in mind is “tax deferred and tax exempted”.Firstly lets take a look at both the types of IRAs,how they work,the benefits of each and why its not so bad to rollover from one plan to the other.Before we go there,lets have a look at the different types of IRAs that can be rolled over.
Roth vs traditional Ira rollover
Traditional IRAs work on the principle of ”live now,save the misery for later”.If you chose to opt for this type of retirement account, then your annual contribution which goes into your account will be taxed when you withdraw it after the age of 59.5 years.For the moment it is “tax deferred”, and the most important reason people opt for the traditional IRA is so that you get good savings form current tax liabilities.Since the contribution amount is deducted before taxes,you automatically fall into a lower tax bracket,so its a double whammy of sorts.
This type of IRA is tax deductible if you file taxes as a single individual and your taxable amount is in the range of 58K to 68K or if you file jointly with your spouse and your taxable income is between 92K to 112K.Just like roth IRAs the break age is 59.5 years and a withdrawal before that will attract a penalty.The only disadvantage we see to investing in a Traditional IRA is the mandatory minimum distribution after the age of 70.5 years.This is a compulsory withdrawal of funds from your IRA.
Roth IRA is an post tax retirement investment scheme whereby your contribution to your IRA is already taxed.This saves you the trouble of paying taxes on them after retiring and you can withdraw any amount of funds from the Roth IRA after you attain the age of 59.5 years.
There is no minimum cap or distribution that must be adhered to after reaching 70 years of age.Since there was no tax deduction at the time of investment,it is totally tax free and the amount invested can be withdrawn without penalty,leaving over the top earnings in the account.The upper limit caps on investment into a Roth IRA are 95K for a single tax filer and 150K for a joint tax filer.
Which brings us to an important question-how to rollover? To understand this simply,traditional IRA is pre tax accumulation and Roth IRA is post tax accumulation.In order to get them on par and transfer funds from traditional to Roth,you would have to pay taxes on your principal contributions in your traditional IRA to convert and rollover to a Roth IRA.The time frame is 60 days from the time you receive a distribution to roll it over.