Jan 6

As I understand it, if I convert the rollover into a Roth, I will then have to report the entire amount on my taxes as income the year I do the conversion. So after “x” number of years when I’m ready to start taking money out of my Roth, won’t I get taxed again? Am I setting myself up to let the IRS tax me twice on some of the same money?

3 comments so far...

  • bud68 Said on January 6th, 2010 at 3:31 pm:

    No. Once you convert it to a Roth, your Roth retirement distributions are tax-free.

  • Audrey A Said on January 6th, 2010 at 3:37 pm:

    Nope. When you convert it into the Roth, you pay taxes on it. Any distributions you then take from the money that you contributed are then tax free. However, to get tax free distributions on anything that the Roth earns (anything over the contribution amount), you must wait until you are at least 59 1/2 years old. If you withdraw it before then it is taxed as ordinary income and you will incur a 10% penalty.

  • efflandt Said on January 6th, 2010 at 4:21 pm:

    The best way to convert is gradually at an annual rate that does not bump your marginal tax bracket. And pay the conversion tax from outside the conversion. Otherwise there would be tax and penalty on the amount withheld from the conversion towards tax (considered a distribution). Converted amounts have to remain in the Roth IRA for 5 years to avoid 10% penalty.

    I adjusted my W-4 to less exemptions than normal to withhold enough tax to cover $9,000 IRA to Roth IRA conversion per year, and specifically tell my broker NOT to withhold tax from the conversion.

    Note that there is a special deal for any conversion in 2010 to spread the tax over 2011 and 2012.

    As long as you follow the rules and do not withdraw too early, Roth IRA distributions are never taxed and never required (no required minimum distribution like regular IRA or 401k).

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