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Tax Tip of the Week
For the week of
November 4, 2002

You can't convert to a Roth IRA if your income is over $100,000

If you're thinking of converting a traditional IRA to a Roth IRA, there are a couple of restrictions to watch out for. You can't make a conversion if your income is above $100,000. Also, you can't convert if you and your spouse file separate tax returns.

The $100,000 limit applies whether you file your tax return as an individual, head of household, or jointly with your spouse. For conversion purposes, income doesn't include the conversion amount, and it also requires other adjustments.

Why would you want to convert? The benefit of a Roth is that withdrawals can be tax-free. With a traditional IRA, withdrawals are generally taxed as ordinary income. The downside of converting to a Roth is that you'll owe taxes based on the value converted. But thanks to the decline in the stock market, the tax bill might be low enough to make a conversion worthwhile.

What happens if you convert, then discover you don't qualify? You must transfer the converted amount (plus earnings or minus losses) back into a traditional IRA. Make the switch by the due date of your tax return, including extensions.

It may be worth exploring whether a conversion makes sense for you, but watch out for the restrictions. For help in analyzing your situation, contact us.

Prior Tax TipsClick here to view previous tax tips.

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