First, see Roth IRA. The main difference between a Roth IRA and a traditional IRA is that you pay taxes up front on a Roth, whereas you are not taxed on your savings with a traditional IRA until you withdraw it.
This is great for those whose tax rates are lower now than they will be in the future, such as recent college grads. But let's say you've already put money into a traditional IRA and want to convert it to a Roth IRA because there are no income or contribution limits for conversions.
Called a backdoor Roth IRA, the only hitch is the amount you transfer will be considered income that might put you in a higher tax bracket just for that year. And you can only do one backdoor Roth IRA conversion per year.
Let's say you are under 50 and have $200,000 in your traditional IRA account pre-tax. So you decide to open a Roth IRA and transfer $50,000 to it. You won't have to worry about the $5,500 per year contribution limit, nor the income limit for singles or married couples. However, since these are converted funds and not contributions, you will have to wait five years to be able to have free access to your funds. You will also have to add $50,000 to your gross income on your tax return. You might want to look before you leap with your tax adviser.
Related or Semi-related Video
Finance: What is a Pension?31 Views
finance a la shmoop. what is a pension? well it rhymes with tension, and likely
for good reason. if you're a teachers pension or a fireman's pension or [person wearing dark glasses writes something down]
another state employees pension that's backed up by a state that's going
bankrupt. Hi, California, Hi Illinois. well we're looking at you. all right people
well a pension is another term for a retirement fund. but what's special about
a pension is that the employer essentially forces you to put away money
for your retirement and then they invested for you.
how nice. or at least be sure you invest it well on a salary of 75 grand a state [gambling table shown]
employed ditch-digger might get a contribution of say 10 grand a year into
her pension, and that's each year 10 grand of forced savings for as long as
she you know digs ditches for the state. and in some states where the unions are
strong in the governing financial knowledge is weak the government
guarantees a minimum financial return on the pension investment made on behalf of
the employees. that is in California for example the state guarantees a 10% per
year return on their invested pension savings. if the invested return like [equation]
investing it in Wall Street and stocks and bonds and private equity funds and
all that stuff well if that invested return is less than that number less
than that 10%, then the state rights to the pinch and a check to cover the
incremental difference. yeah it's a huge Delta and it's well pretty much why you
a Californian Illinois you're going bankrupt remember. Jesus Saves
but Moses invests. [ Moses, holding stone tablets glares and demands interest]
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