![income tax for 2016 and roth ira distribution income tax for 2016 and roth ira distribution](https://www.thetaxadviser.com/content/tta-home/issues/2020/apr/correcting-excess-contributions-iras/_jcr_content/contentSectionArticlePage/article/articleparsys/image.img.jpg)
Today’s federal income tax rates might be the lowest you’ll see for the rest of your life. Current tax rates are low thanks to the TCJA. That said, right now might be the best time ever to convert a traditional IRA into a Roth IRA. So, doing a conversion will trigger a bigger federal income tax bill for the conversion year, and maybe a bigger state income tax bill, too. Nice! Silver Lining for Roth ConversionsĪ Roth conversion is treated as a taxable distribution from your traditional IRA, because you’re deemed to receive a payout from the traditional account with the money then going into the new Roth account. As long as an inherited Roth account is kept open, it can keep earning tax-free income and gains. If a non-spouse beneficiary inherits your Roth IRA, he or she can leave it untouched for at least 10 years. That means your surviving spouse can leave the account untouched for as long as he or she lives.
![income tax for 2016 and roth ira distribution income tax for 2016 and roth ira distribution](https://retirewire.com/wp-content/uploads/2016/08/IRA-Roth-IRA-quick-guide-infographic.png)
Under those rules, if your surviving spouse is the sole account beneficiary of your Roth IRA, he or she can treat the inherited account as his or her own Roth IRA. That’s good, because RMDs taken from a traditional IRA are taxable. Unlike with the traditional IRA, you as the original owner of the Roth account don’t have to take annual required minimum distributions (RMDs) from the Roth account after reaching age 72. From that date forward, as long as you are age 59½ or older on the withdrawal date, you can take federal-income-tax-free Roth IRA withdrawals-including withdrawals from a new Roth IRA established with a 2020 conversion of a traditional IRA. You meet the five-year requirement on January 1, 2021.
![income tax for 2016 and roth ira distribution income tax for 2016 and roth ira distribution](https://dr5dymrsxhdzh.cloudfront.net/blog/images/a6cb7b7e0/2016/10/irs_5498_2021.png)
The five-year clock started ticking on Janu(the first day of your 2016 tax year), even though you did not actually make your initial Roth contribution until April 15, 2017. You opened your first Roth IRA by making a regular annual contribution on April 15, 2017, for your 2016 tax year. That initial contribution can be a regular annual contribution, or it can be a contribution from converting a traditional IRA into a Roth account. To meet the five-year requirement, start the clock ticking on the first day of the tax year for which you make your initial contribution to any Roth account. You reached age 59½, became disabled, or died.You had at least one Roth IRA open for over five years.What is a qualified withdrawal? In general, the tax-free qualified withdrawal is one taken after you meet both of the following requirements: Unlike withdrawals from a traditional IRA, qualified Roth IRA withdrawals are federal-income-tax-free and usually state-income-tax-free, too. So what are the advantages of Roth IRA? Roth IRAs Have Two Big Tax Advantages In hindsight, maybe that was a good thing.įor many, the financial fallout from the COVID-19 crisis creates a once-in-a-lifetime opportunity to do Roth conversions at an affordable tax cost and also gain insurance against future tax rate increases. But, of course, you didn’t get around to it. For years, financial and tax advisors have lectured about the wonderfulness of Roth IRAs and why you should convert traditional IRAs into Roth accounts.