Can I convert part of my pension into a Roth IRA and take money out of it if needed?
I have an old pension that I am planning to roll over into a traditional IRA to take advantage of potential returns greater than the 3 percent that it currently receives. Is it possible to convert some of that to a Roth IRA, then take money out if I need it?
You can always convert part of an IRA to a Roth IRA. When you do this, you must pay taxes on the amoutn of the conversion at your ordinary income tax rate. You can convert all of the the IRA or just a portion of it, but everything you convert will be subject to taxes. To achieve your goal, you may not need to convert to a Roth.
As I noted, when you convert to a Roth, you immediately pay the full income tax. The the funds can grow tax free from there. Affter 5 years, you can withdraw from the Roth the original money as well as any growth, completely tax free. Here is the real advantage is the tax-free growth.
Even if you don't convert the traditional IRA to a Roath, i f fyou are over 55, you can always withdraw from a traditional IRA. The amount you withdraw from the traditional IRA will be subject to ordinary income tax rates- both the initial rollover as well as any growth. But wit this approach, you only pay the income tax on each witdrawal.
If you goal is to access the funds, both a traditional IRA and a Roth IRA can allow for this. THe difference will be the timing of the taxes. If you can afford the upfront taxes of the Roth conversion, and plan to wait at least five years before you access the funds, you will save the taxes on the growth.
Yes, once the funds are in the traditional IRA you may convert some (or all) of it to a Roth IRA. Keep in mind that Roth conversion’s have their own “5-year clock”, so depending on your age and how long the funds are in the Roth, you may incur penalties. Here is a bit more information. Make sure you have a good handle on these provisions!
Thanks for your question and contact me if I can be of assistance.