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What is a ROTH IRA?

Answer: A ROTH IRA is a retirement account whereby individuals can put up to $4000 (non-deductible) per year of earned income into the plan, with a $500 addition permitted for those over 50 years of age. While in the plan, asset growth, dividends and interest are not taxable, and monies withdrawn from the plan are tax free under certain conditions.

What is a ROTH CONVERSION IRA?

Answer: A ROTH CONVERSION IRA is a retirement account established when someone converts from a Regular IRA.

When was a ROTH CONVERSION IRA first made available?

Answer: January 1998.

Can anyone convert from an IRA to a ROTH CONVERSION IRA?

Answer: No. Conversion from a Regular IRA to a ROTH IRA is NOT allowed when modified adjusted annual gross income exceeds $100,000 (married couples filing jointly and single filers) or more per year during the year in which the conversion takes place.

What if I convert from an IRA to a ROTH CONVERSION IRA and then discover that I've exceeded the income eligibility requirement?

Answer: The conversion is reversed without tax penalties.

Can anyone convert from other type of retirement plans (401K, 403B/TSA, Sep-IRA, SIMPLE IRAs and the like to a ROTH CONVERSION IRA?

Answer: Generally, if these type accounts allow conversion to IRAs, then the IRAs can be converted to ROTH CONVERSION IRAs. Restrictions might apply for individuals still employed and participating in company or organizational sponsored plans.

What happens from a tax point of view when I convert to a Roth IRA?

Answer: The entire amount converted is subject to income taxes. Basically, whatever amount is converted is added to your other income during the year and taxes are due on that new total gross amount at whatever rate is appropriate for your filing.

If I convert to a Roth IRA when are the taxes due on the conversion?

Answer: Taxes are due when you file your tax return for the year. However, if you convert in 1998 then the IRS permits you as an option to divide the converted amount by four and add those equal amounts to your gross income yearly over the next four years, taxes are then due when you file your return for the appropriate year.

Can I withdraw funds from my converted Roth IRA to pay the taxes due?

Answer: No. Taxes must be paid out of other funds.

Why would anyone want to pay taxes now? All things being equal, isn't someone always better off deferring taxes as long as they can, since then can use those tax monies to compound and grow within an account?

Answer: Yes. Generally speaking, too longer one can defer tax expense the better off you are, since you’re not in a 100% tax bracket at least a portion of the compounded growth of the tax monies will accrue to you on a net after tax basis. However, in the case of a ROTH IRA CONVERSION account all things are not quite equal since in this type of account the monies compound tax free as opposed to compounding on a tax deferred rate.

Can you provide examples of the lump sum net after tax dollar difference between converting another retirement plan in 1998 into a ROTH IRA?

Answer: Yes. Assume a 30 year old, 40 year old, 50 year old and 59 year old all have $10000 IRAs, all want to access their account at age 65, all are in the 35% tax bracket now and all will be in the 35% tax bracket later, all earn 10% on investment; given those assumptions, then the net after tax advantage in favor of converting to a ROTH IRA (per $10,000) for the 30 year old is $79,264, for the 40 year old it's $26,301, for the 50 year old it's $7,872, and for the 59 year old it's $2163.

In a nutshell, and in just a few words can you tell me why ROTH CONVERSIONS give you net after tax more than not converting?

Answer: It's because by far the largest component of most retirement plans is the growth component, not the contribution component; and the deductible plans compounded growth is eventually taxable, whereas the ROTH alternative compounded growth is tax free. It's sort of like compounding out 8.0% NET-AFTER-TAX versus 10% TAX-FREE.

Beside potentially a higher net after tax advantage by converting, what other advantage, if any, can be derived from converting to a ROTH CONVERSION IRA?

Answer: Withdrawals from ROTH IRAs are tax free if account opened at least five (5) years and owner is over 59 1/2. At any age, after the account is opened 5 years one can withdraw a lifetime maximum of $10,000 (contributions and earnings) without taxes or penalties for a first time home purchase for account owner or others. At any age, after the account is opened 5 years for any reason one can withdraw the amount(s) contributed (NOT EARNINGS) without tax or penalties from a ROTH CONVERSION IRA. Unlike Regular IRAs, there is no requirement to ever withdraw from a ROTH IRA; hence, these accounts can be held until death and passed on to spouses, children or other heirs on a income tax free basis.

Can I convert only part of my IRA to a ROTH IRA?

Answer: Yes

Who can I name as the beneficiary of my Roth IRA, and what happens to the account value when I die?

Answer: One can name whomever they wish as beneficiary, subject to some state residence laws. Anyone named as beneficiary receives the income from the ROTH IRA free of income tax. Spouses receive the principal from a ROTH IRA estate tax free, but other non-spousal beneficiaries might receive less than the total value of the ROTH because the distribution might be subject to federal and state estate tax, which is dependent on the gross value of the deceased entire estate.

If I should decide to establish a ROTH IRA or do a ROTH IRA conversion, what investment choices are available for the funding?

Answer: There are families of mutual funds, variable annuities, bank CDs, fixed annuities, equity indexed annuities, stocks, bonds and other choices available for the funding these accounts. Which investment selection is most appropriate, depends very much on your personal objectives. Each asset form has certain advantages.

All Mutual Funds, Variable Annuities and Variable Life Insurance policies are offered by prospectus ONLY. For complete information including charges and expenses obtain a prospectus, and read it carefully before you invest.

Mutual Fund, Variable Annuity and Variable Life prospectuses are available directly from the issuing companies when product information is requested, and in some cases, they can be downloaded directly on the issuing company's internet website.

The tax deferral characteristic associated with variable annuities is not needed when used in an account that is by definition tax deferred (retirement accounts) and according to some sources variable annuities generally have higher fees and internal expenses than mutual funds.

Systematic and dollar cost averaging within Mutual Funds, Variable Annuities and Variable Life insurance policies does not assure a profit and does not protect against loss in declining markets. It involves continuous investment in securities regardless of fluctuating prices and the investor should consider his or her financial ability to continue purchases through periods of low price levels.

Investing in stocks, bonds, mutual funds and variable annuities does not guarantee a profit. All of these investments can lose money.

Stocks, bonds, mutual funds and variable annuities are not FDIC insured.

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