1. How is a Roth IRA different from a Traditional IRA?
With a Roth IRA, you contribute money that's already been taxed (that is, "after-tax" dollars). Any earnings in a Roth IRA grow tax-free as long as they stay in the account. Withdrawals of earnings from Roth IRAs are federal income tax free if a 5-year aging period has been met and the account owner is age 59 ½ or over, disabled or deceased. Roth IRAs are not subject to Minimum Required Distribution (MRD) rules during the lifetime of the original owner, so you can leave your assets in the Roth IRA where they have the potential to continue to grow.
2. Should you consider converting to a Roth IRA?
For many individuals, converting to a Roth IRA may make sense. You pay federal income taxes now on the conversion amount, but none on any future earnings as long as when withdrawals are taken, the 5-year aging period has been met and you are age 59 ½ or over, disabled or deceased. There are also no Minimum Required Distributions (MRDs) from a Roth IRA during the lifetime of the original owner. If you think your tax rate will be the same or higher than your current rate when you withdraw your money, it may make sense to consider converting to a Roth IRA now.
3. What account types can you convert?
Traditional IRAs (including Rollover IRAs), SEP-IRAs, SAR-SEP IRAs, and SIMPLE IRAs are all eligible to be converted to a Roth IRA (SIMPLE IRA contributions cannot be converted to a Roth IRA during the first two years). Rollover IRAs containing assets from an employer-sponsored plan account are also eligible to be converted. In addition, balances from employer-sponsored savings plans (e.g., a 401(k) or 403(b) plan) that are eligible for distribution and rollover may generally be converted (for example, when you are no longer working for the company sponsoring the plan).