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Myths Regarding Roth IRA Conversions

October 3, 2012

Unfortunately, all of the attention lately on Roth IRA conversions comes with a flood of misinformation. The following are a few common myths regarding Roth IRA conversions and the realities investors should know:

  • Myth 1: A Roth IRA conversion is irreversible – This is not true, you have the right to change your mind later (up to October 15th of the following year) and get your taxes back that you paid for the conversion.
  • Myth 2: After you convert, you can’t touch the money for five years – To withdraw earnings from a Roth IRA tax-free, it is true that the account must have been open for at least five years OR you have reached the age of 59-1/2. It is possible to withdraw your earnings before this time, but you will incur a 10% early-withdrawal penalty.
  • Myth 3: Only one conversion is allowed per year – A traditional IRA can be partially converted into a Roth IRA multiple times in a year, providing significantly more flexibility for investors.
  • Myth 4: Roth conversions cannot be made by people who are under age 59-1/2 or over age 70-1/2 – There is no age limit for conversions. Individuals older than 70-1/2 must satisfy their Required Minimum Distribution (RMD) before converting the remainder of their assets to a Roth IRA.

Since 2012 when Congress lifted the income restrictions on Roth IRA conversions, myths about the new rules have spread like wildfire. The reality is that Roth IRAs are becoming increasingly popular because earnings accumulate tax-deferred and then can be withdrawn tax- free if the appropriate requirements are met.

Converting a traditional IRA to a Roth IRA is an appealing option for individuals who believe their retirement income will be taxed at a higher rate than their current income. As always, seek the advice and counsel of a financial professional before making investment decisions. Give us a call today at 407-367-3472 or toll free at 877-259-3256!