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IRA conversions an option in Wisconsin

March 20th, 2010 • Related • Filed Under

If you’re a Wisconsin resident, you can now convert a traditional Individual Retirement Account into a Roth IRA without penalty, regardless of income.

This is an important change that brings Wisconsin law in line with federal tax law changes enacted this year. Previously, Wisconsin residents with incomes of more than $100,000 faced penalties for IRA conversions.

“If you’re a baby boomer trying to save for retirement, the decision between investing in a traditional or Roth IRA isn’t easy,” begins a comparison of the two on Yahoo Finance.

With a traditional IRA, you don’t pay taxes on the earnings until the money is withdrawn. Depending on income, contributions may be tax deductible.

With a Roth IRA, earnings grow tax-free and withdrawals are free from federal taxes if the account is at least five years old and the money is withdrawn after age 59 1/2. Contributions are made on an after-tax basis.

If you’re in your 40s and 50s, you have several factors to consider when you’re deciding between a traditional IRA and a Roth IRA, including your current and future tax bracket, whether you’ll be able to deduct your contributions, your total retirement savings, and whether you have a retirement plan at work.

Converted funds are also subject to taxes, which is another crucial consideration. However, investors who converts in 2010 may be able to pay the tax bill over two years.

According to a survey by the financial services company USAA, 73 percent of baby boomers who own an IRA are not planning to convert their traditional IRA to a Roth IRA in 2010.

Beware: bad advice abounds on IRA conversions, and mistakes can be costly, writes syndicated financial columnist Humberto Cruz. Take the time to educate yourself rather than relying solely on financial advisers to get up to speed.