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Chapter 7. Individual Retirement Accounts > Conversion to a Roth IRA

Conversion to a Roth IRA

Converting a traditional IRA to a Roth IRA is an option available to people whose adjusted gross income in 2003 is no more than $100,000. This $100,000 figure applies to both single people and married couples filing a joint tax return. By a quirk in the law, married people filing separately are not eligible to convert a traditional IRA to a Roth IRA. Careful readers may have picked up on the fact that the income rules for opening a new Roth IRA are different from the income rules for converting a traditional IRA to a Roth IRA. If so, you are probably smarter than your Congressman who wrote these laws.

For many people, converting their traditional IRA account into a Roth IRA account presents a good news, bad news situation. The good news is that once you have converted your traditional IRA into a Roth IRA, all the money in that account will grow tax free and can be either taken out or passed to the next generation without taxes. But the bad news is that if you convert a traditional IRA to a Roth IRA, you must pay income taxes on all the money you convert. And the worst news is that you may find that after your conversion, the stock market heads for the porcelain receptacle (a nicer way of saying toilet) and you find yourself with a tax bill on a conversion of an account, for example, valued at $10,000, that by the time it comes to pay taxes is only worth about $6,000. In this example, someone in the 28% tax bracket would pay an extra $1,128 in taxes.


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