Deadline Approaching for Roth IRA Conversions
A deadline for converting to a Roth IRA is quickly approaching. Investors have until the end of this month (December 2010) to defer taxes on a conversion.
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- Deadline Approaching for Roth IRA Conversions
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- How Correlated Are Preferred Stock With Bonds?
- From the Bookshelf
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A Roth IRA is funded with aftertax dollars. In other words, you pay taxes on dollars contributed into a Roth IRA. Future withdrawals are then eligible to be made on a tax-free basis, regardless of how much the account balance has grown. Conversely, a traditional IRA is funded with pretax dollars and withdrawals are taxed. This means you are taxed on the amount of the withdrawal, which includes the original deposit and any realized gain on that deposit—a big difference.
Previously, individuals were allowed to convert traditional IRA assets to a Roth IRA if their income was below $100,000 and if they paid taxes at the time of conversion. At the start of this year, the maximum limit on income was eliminated. Moreover, a one-year rule was instituted that allowed the taxes on the conversion to be paid over a two-year period. This rule is about to expire.
Here is how it works: If you convert from a traditional IRA to a Roth IRA by December 31, 2010, you can either pay the taxes on the conversion this year or you can opt to pay half the balance due in 2011 and the other half in 2012. If you wait until January to convert, you will lose this option to defer the tax payments.
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