Roth IRA Conversions

Why Convert to a Roth IRA?

Converting a traditional IRA (Individual Retirement Account) or an eligible employer-sponsored plan to a Roth IRA may provide you with many benefits, including the potential for tax-free distributions. Roth IRAs can be especially beneficial for those who feel they may face higher federal income taxes in retirement.

When such a conversion occurs, the IRA account holder must pay federal income tax on the amount of assets being converted. But many feel that the advantages of conversion are significant: Once federal income taxes have been paid on the conversion dollars, the money that is transferred to the Roth IRA will grow inside the account free of federal taxes—and no federal taxes will be due on the Roth IRA funds that are withdrawn, as long as certain requirements are met1.

The Benefits of Roth IRAs

  • You’ll pay no federal income taxes on your Roth IRA withdrawals (including your account’s investment earnings) if you meet certain requirements1.
  • You may withdraw your own contributions (but not your account’s investment earnings or any money contributed to your account through a conversion2) at any time, tax- and penalty-free.  Separate holding period requirements for penalty-free withdrawals apply to amounts that were converted to a Roth IRA.
  • If you qualify, you can contribute up to $5,000 or your taxable compensation for the year—whichever is less—to a Roth IRA for 2011. You may contribute up to $6,000 if you are 50 or older by December 31. (Note that this is a combined contribution limit for IRAs and Roth IRAs.)
  • Unlike a traditional IRA, with a Roth IRA, there are no guidelines that require you to begin taking withdrawals within a certain time frame.

Before You Convert to a Roth IRA…

The decision to convert to a Roth IRA needs to be made with care and isn't for everyone. Be sure to consider, among other things, your personal tax situation, including expected future tax rate, the time you have until you'll need the money, and the opportunity costs of using "cash" to pay the tax liability. As with any tax-related issue, it's a good idea to check with your tax advisor before making any decisions.

You may wish to check out our handy Roth IRA Conversion Calculator to help yourself determine if a Roth IRA conversion may be right for you.

Before you initiate a Roth IRA conversion, you may wish to consult a financial professional to ensure that you understand the IRS’s Roth IRA conversion guidelines. If you prefer, a Prudential Retirement® Counselor can assist you. Simply call 1-877-PRU-2100 toll free, Monday through Friday, from 8 a.m. to 6 p.m., ET.

1 In order for distributions to be made from a Roth IRA free of penalties and federal income taxes, your Roth IRA must have been established at least five tax years before the withdrawal (period begins with the tax year for which your first contribution is made) and your distribution must be: a) made on or after the date you attain age 59½; b) made to your beneficiary or your estate after your death; c) attributable to your being disabled; or d) taken because you are a qualified first-time home-buyer (lifetime limit of $10,000). Separate holding periods apply to amounts converted to a Roth IRA.

2 Any withdrawals you make of conversion dollars within five years of conversion or of your account’s investment earnings before reaching age 59½ may be subject to a 10% federal income tax penalty.

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