Dear Dr. Don,
I’m 35 years old, married, with a joint adjusted gross income of $128,000 last year. I have $28,000 in a Roth IRA, $68,000 in my current employer’s 403(b) and $19,500 in a rollover IRA. (I rolled over a 401(k) from my previous employer.)
With all the talk about converting a traditional IRA to a Roth IRA, where does a rollover IRA stand on this issue? Is a rollover IRA a traditional IRA that I should think about converting to a Roth? Or does it act like a Roth and I don’t have to worry about it?
— Nancy Nestegg
Let’s take a step back and call the transfer of funds from your previous employer’s 401(k) plan a rollover contribution into a traditional IRA. That makes it clearer why the account doesn’t act like a Roth IRA and why you should still consider whether you want to convert to a Roth IRA.
The traditional IRA doesn’t act like a Roth IRA. The traditional IRA is a tax-deferred retirement account. The Roth IRA isn’t tax-deferred, it’s tax-advantaged. Qualified distributions out of a Roth are tax-free in retirement. Qualified distributions out of the rollover IRA are taxed as ordinary income in retirement.
Should you convert? I think it makes sense if you can afford to pay the income taxes due from nonretirement account monies and the conversion income doesn’t push you into a higher tax bracket. Before you convert, make sure it won’t cause you to lose other tax credits or benefits.
By converting, you’ll have a measure of “tax diversification” with the monies still held in your tax-deferred 403(b) plan, and you’ve got a long investment horizon for the Roth monies to grow in value.
The Bankrate feature “7 steps to a 2010 Roth IRA conversion” can help with the particulars, but you should get professional tax advice if you’re uncertain about whether to convert.
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