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Advantages of Roth IRA conversions

ST. LOUIS, Mo. _What is an IRA and what are the advantages? Matt Allgeyer, Financial Advisor with Wamhoff Financial Planning & Accounting Services, joined us in the FOX 2 studio with the answers.

What is a Roth IRA, and what are the advantages?

• A Roth ira consists of monies invested after one pays taxes.
• The growth of the investment over time can be used as tax-free money at retirement. This money, used in conjunction with your ira distributions, can help you save more on taxes than if you had used only a traditional ira to fund your retirement.
• You are not required to take distributions from a Roth IRA at age 70-1/2 like you are with a traditional ira. Therefore, you can leave the money in the account until a later time, or even pass it on to your heirs.

Do investors earning over the mandated amounts qualify for a Roth IRA?

• While investors earning over these amounts are not able to contribute to a Roth IRA directly on an annual basis, they can leverage a tool called a Roth Conversion.
• A Roth Converstion allows you to take part, or all, of your traditional ira and convert it to a roth ira so that you can take advantage of the benefits.
• If you do a Roth Conversion, you will have to pay the tax on the conversion in that same year, and those must be funds outside the transfer. In other words, you cannot use part of your IRA money to fund the taxes. You must pay the taxes in that same year.

Is a Roth Conversion right for me?

• If you are concerned with taxes through your retirement, a Roth Conversion is a strategy you should discuss with your financial advisor. That`s because incorporating a Roth IRA into your overall financial plan means that you won`t be paying taxes on those distributions in retirement. It`s money that`s already been taxed.
• This strategy can work for any investor, but can work the best for those with household income above $133,000, and for those between the ages of 25 and 60.
• The advantages of tax-free deferral always exist, but are more beneficial if you have some years to grow the investment before needing the funds.
• When in doubt, talk with your financial advisor.