Weekly Financial tip from Steve Sexton: Converting Your IRA

Join the San Diego Entertainer’s trusted financial advisor Steve Sexton as he offers you another great money-saving strategy that will help you keep your finances where you want them: in your bank account. In this week’s tip, Steve explains Roth conversions, or the conversion of the money in your IRA into a Roth IRA. To view Steve’s advice in detail, see the video below.

Steve explains that what most people don’t know about their IRAs is that they are their highest taxed assets. Money can be put into an IRA account and allowed to grow free of taxation, but when it is taken out of the IRA for any reason, for example, to pass on to one’s children, that large lump sum of money is taxed heavily by the government. Roth IRAs, on the other hand, not only allow your money to multiply tax-free, but also allow you to remove that money without it being taxed. The only point at which the money in a Roth IRA is taxed is when it is initially converted from an IRA to a Roth IRA.

But before embarking on the process of converting from an IRA to a Roth IRA, Steve emphasizes that a few considerations need to be taken into account. In 2010, it is possible for you to convert your whole IRA to a Roth IRA, because there are no limitations on your income in this year. What this means is that you would not have to pay taxes on the money that you convert in 2010 until the years 2011 and 2012. In 2011 however, you would most likely be in a higher 25% or greater tax bracket, meaning that your money would be taxed at around a rate of 28%.

So how can you avoid this higher tax rate while converting your IRA? Steve explains that in order to avoid being placed in the 25% or greater tax bracket, some of his clients prefer to convert from their IRAs to Roth IRAs over a five or ten year time period, which allows them to remain at a 15% tax bracket. Others prefer to use green partnerships, tax deductible investments, tax credits, or bonuses from annuities to offset their tax burden.

Whatever the solution, Steve emphasizes that the most important consideration is what sort of conversion your personal income level will support so that your IRA can give you enough money to support you for the rest of your life and to keep your family safe and comfortable after you pass that money on to them.

Are you  looking for more ways to save money? Steve Sexton offers weekly financial tips on SDEntertainer.com. Lean how to formulate the perfect investment strategy for you through a proper understanding of risk. Once you understand your risk comfort level you will be able to properly assign your investments into categories you are satisfied with. Last week Steve explained the Three Worlds of Investing, to learn more, watch last week’s clip now.

You can watch Steve Sexton every week on E&L TV, on San Diego Channel 4 at 11:00pm.

The Entertainer & Lifestyles Magazine has partnered with a top local financial expert to provide ongoing financial advisories. As part of the Entertainer’s continued commitment to San Diego’s financial wellbeing, Steve Sexton will continue to contribute and provide financial advice to our readers. Learn more about Steve Sexton on the Entertainer or tune in next week for another tip.You can contact Steve by logging onto his website sextonadvisorygroup.com

Photo from alancleaver_2000 via flickr