Click our video above to watch John O'Rourke, Vice President of Private Banking & Wealth Advisor, answer a frequently asked question when it comes to converting to a Roth IRA and explains how the five-year rule may help you make the right decision.
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[On screen text- Investment Insights: The 5 Year Rule]
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[On screen text: John O’Rourke – Vice President, Private Banking & Wealth Advisor – First American Bank]
John: Are you thinking of converting or rolling over your Traditional IRA into a Roth IRA? While there are compelling reasons for doing so, a conversion will typically trigger an income tax bill that can be substantial and is usually paid from current income and or non-retirement savings. However, once the money is inside the Roth, any growth and future withdrawals will be “Tax-Free” with no Required Minimum Distributions.
Good candidates for Roth conversions tend to be young savers in lower tax brackets who expect their incomes to climb over the years as well as older individuals who could be forced into higher tax brackets when they start taking their Required Minimum Distributions. Also, it may make sense to consider a conversion if the value of a traditional IRA account has dropped, helping to ease the income tax burden.
Deciding on whether or not to convert to a Roth IRA is a decision not to be taken lightly. A question we get asked frequently is “How does the Five-Year Rule apply to Conversions?”
Withdrawals — including both your contributions and any investment earnings — are completely tax- and penalty-free so long as you satisfy a five-year holding period and meet one of the following conditions:
You've reached age 59½, the withdrawal is for a qualifying disability, is being used for First-Time Home Buyer expenses, or is made by your beneficiary or estate after your death.
These are just a few considerations and speaking with a professional financial advisor will go a long way in helping you make the right decision.
Feel free to drop any comments or suggestions below! I’d love to hear from you.
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