Question

Your​ client, Charley​ Long, age​ 40, has requested your advice with respect to his IRA. He has a traditional IRA with a balance of​ $250,000 and his current AGI is​ $150,000. He expects his income to increase slightly when he retires at age 65. Charley has been reading about Roth IRAs and wants your advice as to whether he should rollover the​ $250,000 from his traditional IRA into a Roth IRA. He has sufficient outside money to pay any taxes due on the rollover. What advice would you give​ Charley?

A.

If Charley rolls his traditional IRA into a Roth​ IRA, he must include the rollover in his gross income and pay income taxes on such​ amount, but when Charley withdraws amounts from his Roth IRA at​ retirement, no further taxes will be due. Since​ Charley's marginal tax rate at retirement will be no higher than his present rate and he has funds outside of his IRA to pay the​ tax, he should be advised to roll over his traditional IRA into a Roth IRA and pay the tax now. The principal economic benefit is that the rollover funds in the Roth IRA are able to grow​ tax-free and be ultimately withdrawn​ tax-free.

B.

If Charley rolls his traditional IRA into a Roth​ IRA, he must include the rollover in his gross income and pay income taxes on such​ amount, and when Charley withdraws amounts from his Roth IRA at​ retirement, more taxes will be due.​ Thus, he should not be advised to rollover his traditional IRA into a Roth IRA.

C.

If Charley rolls his traditional IRA into a Roth​ IRA, he must include the rollover in his gross income and pay income taxes on such amount. Since his tax rate is much higher now than it will be at​ retirement, he should not be advised to roll over his traditional IRA into a Roth IRA.

D.

Since there are no tax implications when rolling a traditional IRA into a Roth​ IRA, Charley should be advised to roll over his traditional IRA into a Roth IRA. The principal economic benefit is that the rollover funds in the Roth IRA are able to grow​ tax-free and be ultimately withdrawn​ tax-free.

Answer 1

In case of Traditional IRA contribution made are tax deductible but withdrawl are taxable at retirement.

In case of Roth IRA contribution made are not tax deductible but the withdrwal are tax free at retirement.

In case of conversion from traditional to Roth IRA tax is payable on the conversion amount. But if individual has greater income at the time of retirement then it would be beneficial to get the tax free withdrawl at retirement.

A) If Charley rolls his traditional IRA into a Roth​ IRA, he must include the rollover in his gross income and pay income taxes on such​ amount, but when Charley withdraws amounts from his Roth IRA at​ retirement, no further taxes will be due. Since​ Charley's marginal tax rate at retirement will be no higher than his present rate and he has funds outside of his IRA to pay the​ tax, he should be advised to roll over his traditional IRA into a Roth IRA and pay the tax now. The principal economic benefit is that the rollover funds in the Roth IRA are able to grow​ tax-free and be ultimately withdrawn​ tax-free.