Don't Rush into IRA Conversion

So, maybe you are running down your financial to-do list and you've come to this one...

• Convert Traditional IRA to Roth

Good for you. You know that the recent changes in IRA conversions opens up this possibility to many more people and that the change took place this year.

You also know that getting in on Roth has it's advantages. Such as:

• Tax-free withdrawals once you hit age 59.5
• No mandatory minimum distributions when you reach age 70.5
• Dipping into your Roth earnings doesn't have tax implications
• No age limit on contributions

In contrast the Traditional IRA

• Contributions may be tax-deductible
• Withdraws can begin at age 59.5, but are mandatory when you reach 70.5
• Taxes are paid on earnings when withdrawn

The biggest difference, however, between the two is seen in how they handle taxes. The Traditional IRA is tax-deferred and the Roth is tax-exempt. Both vehicles let you earn income without paying taxes on profits along the way, but the Traditional IRA will bring you a tax bill later (deferred). Earning on the Roth are not taxed, though you will pay taxes now on the money you contribute.

On the surface the Roth definitely looks like the more winning deal. But before you rush into conversion you've got some thinking to do. Take a look at the last sentence in the previous paragraph for a clue. What happens when you convert from a Traditional IRA to a Roth is that the chunk of money that you pull out of the Traditional is a contribute to your new Roth and you'll have to pay taxes on it. You can either take the taxes out of these funds or if you've got extra cash laying around, you can use that to pay the taxes. Either way the tax man cometh.

In some cases the conversion is painless and makes perfect sense. For others the amount of money you'll lose to upfront taxes will not justify the end gain. Before you move forward you may want to consult the Investment and Retirement Team at Coors Credit Union. They can offer a no-cost, no-obligations review of your situation.