Making sense of all the IRA Options

Withdrawals outside of RMDs are still called distributions. However, the taxes on them are different then

if you do so after the age of 59 ½.

For the Roth IRA Account, the money deposited needs to stay in the account at least 5 years after

deposit. Otherwise you suffer a penalty for early withdrawal.  After 59 ½ you have no taxable charge. The

first monies out are deemed deposits by the IRS, then comes any conversion funds needing to pass five-

years from deposit, and then any earnings.

Traditional IRA Accounts are a bit more straightforward. Again, any withdrawals are considered taxable

income, depending on your current tax bracket.

Sometimes the best laid plans just don’t work. A conversion may seem like the best idea to maximize the

benefits of IRA Accounts and then reality sets in. So is there some kind of reverse button one can press

to stop a conversion? In a sense, yes.

First, if you are going to reverse a conversion, or a “recharacterization” as it is called, you need to do by

the October 15 following the same tax year as the conversion itself. The IRS doesn’t give you forever to

change your mind. So if you converted in 2010, the market sank, and you didn’t like what happened, you

have until October 15, 2011 to fix the mistake.

This approach can be very helpful when dealing with market losses. Don’t fool yourself; you lost money

when the market sank. However, if you have the extra funds, you can return the full amount converted

back to your Traditional IRA account, thereby keeping your retirement savings whole. You have then

shifted the loss to your regular pocket instead of it being a hit on your retirement savings.

You can still do a conversion again, but you will need to wait until the next calendar year to do so.

Retirement IRA accounts can provide significant benefits for retirement if used wisely. In fact, many

planners suggest a combination of IRA types to take advantage of both pre-tax and post-tax benefits.

That said, you need to pay attention to the specific IRA rules that apply to make sure you don’t lose your

money unnecessarily to taxes or penalties. Failure to do so could make all your hard work and savings

go up in smoke.