Roth IRA Conversions: What to Consider

Last Updated Jan 6, 2010 10:20 AM EST

Yesterday, we explored some of the nuts and bolts of converting traditional IRAs to Roth IRAs. Today, we'll look at some items you should consider when thinking about converting.

Investors' personal IRAs are eligible for conversion. So are IRAs inherited from spouses. However, other inherited IRAs are not eligible for conversion.

Once IRAs have been converted, you have to hold the assets in the Roth IRA for either five years or until you turn 59½ before you start withdrawing the converted amount. In addition, the "earnings" on those assets must remain in the Roth IRA for at least five years before they're withdrawn, regardless of your age. Otherwise, such withdrawals result in a 10 percent early withdrawal penalty.

It's also important to note that a conversion is not necessarily permanent. If the conversion ends up being a mistake, the conversion can be recharacterized back to a traditional IRA without penalty if done in a timely manner. For example, if an investor converts an IRA to a Roth IRA and then experiences a drop in the account's value, it may make sense to recharacterize the account back, then convert at a later date and pay less tax.

Tomorrow, we'll look at some questions you should ask yourself when considering a Roth IRA conversion.

Follow the series: Roth IRA Conversions
  • Larry Swedroe On Twitter»

    Larry Swedroe is director of research for The BAM Alliance. He has authored or co-authored 13 books, including his most recent, Think, Act, and Invest Like Warren Buffett. His opinions and comments expressed on this site are his own and may not accurately reflect those of the firm.

Comments

CBSN Live

pop-out
Live Video

Market Data

Watch CBSN Live

Watch CBS News anytime, anywhere with the new 24/7 digital news network. Stream CBSN live or on demand for FREE on your TV, computer, tablet, or smartphone.

Market News

Stock Watchlist